Posts Tagged ‘IT Finance’

Regardless of the size of your organization, someone is responsible for identifying the need of a service or product being purchased. One could therefore surmise this individual would also assume the ongoing ownership and maintenance of the product, providing vendor management oversight, right? Well, you might be surprised by the number of occasions on which the linear progression of identifying a need and satisfying the need becomes disconnected in technology organizations.

This disconnect often occurs when a business unit obtains approval to bring a new product to the company which in turn places new or expanded requirements on its Information Technology (IT) organization.  With their backs often against the wall, the IT department will “buy” the technology in order to meet required deadlines. What happens in this case is that the IT department ends up relying on the vendor to manage the technology, and often times let the supplier act as the IT point of contact for the “customer” – the internal business unit.  Well, as we know problems often start out small and later mushroom out of control.  This situation is no exception:  If the new product the company has developed becomes successful, IT will continue to buy more of the necessary technology for the business unit.  The next thing you know, the original contract for, say, $100,000 morphs into an agreement covering perhaps $5M in purchases – and since the vendor manages the technology, no clear internal owner exists.  A sure-fire recipe for big problems.

The process starts with the negotiation of the contract which typically initiates a rather ‘interesting” time within the organization.  The discussions with the supplier often times become stressful with both sides treating the negotiations as a form of competition to obtain the best price and terms.  This is further complicated with the coordination of the different groups who provide input and are required to approve on both sides of the agreement. For example, the finance departments will be called upon to review the financial impact to budgets and Return on Investment (“ROI”), while the procurement and legal departments review terms and conditions.  With all these organizational units involved, the final agreement ends up segregated into sections which are relevant to disparate groups within the organization, and in many instances no single person understands the agreement as a whole.  This issue can be avoided by identifying the organizational unit that owns and drives the negotiation of the agreement, and ensuring this unit also has the authority to represent the company and manage the supplier.  By insisting on thorough preparation and coordination regarding input and approval processes in advance, the individual or group acting in the vendor management capacity will not only secure a contract which is beneficial to the company but will also foster a positive ongoing relationship with the supplier.

With the vendor management role clearly defined, you will avoid the most costly mistake of relying on the supplier to manage the agreement for your company.  The vendor manager will not only monitor the suppliers’ performance, but will also leverage the vendor on your company’s behalf to provide service level and performance metrics along with other valued services such as expert consulting support.  The individual acting in this role in your company can carry the title of Vendor Manager and coordinate with the technology owner(s), or this role can actually be incorporated into the technology owner’s job description.  In any event, the most important role of the vendor manager is to routinely meet with the supplier to review performance and to insure the negotiated service level agreements are applicable and are being met.  For those of you who practice ITIL, you may even want to invite your suppliers to attend your problem management reviews.  Problem Management aims to resolve the root causes of incidents and thus to minimize the adverse impact of incidents and problems on business that are caused by errors within the IT infrastructure and to prevent recurrence of incidents related to these errors.   Inviting suppliers to problem management reviews was always my favorite way to make sure the supplier understood my business and was focused on working for my company.

Identifying issues with your existing contract will insure that your company is prepared when it is time to negotiate a new agreement. This is especially critical in large organizations with dedicated procurement departments.  These procurement teams are responsible for negotiating agreements on behalf of the technology owner(s), often based upon templates and procurement methodologies meant to cover everything from bed pans to mainframes.  In these circumstances, the vendor manager must be prepared to identify and educate the procurement manager on any issues with the current supplier. This is especially true with products that the procurement department might consider as “commodities”.   (Products are referred to as commodities when the product is seen as fungible or the same no matter who produces it.)  The commodities tag can sometimes prove to be a BIG mistake, especially with technology as this term is often applied incorrectly.  I once had a junior level negotiator assigned to a request for purchase because the procurement department perceived desktop computers as fungible commodities.   That quickly changed once we were able to quickly show – from trends in our monthly product performance scorecards that we had experienced a 20% failure rate of over 75,000 desktops that had been in service less than a year.  These failures not only had a negative impact on customer service but also negatively impacted IT service level metrics with a dramatic increase in help desk calls and required additional contracted field support to fix the devices.  The vendor manager was subsequently able to successfully team with the procurement department and negotiate product quality guarantee’s which the suppliers indicated had never before been included in their contracts.

Once your suppliers are being actively managed, your organization can maintain a fully mature vendor management model by monitoring the lifecycle of your agreements.  The hallmark of a mature vendor management lifecycle model is tracking when agreements are scheduled to terminate.    Being prepared for expiring contracts is critical because your vendor manager will make sure all necessary parties are prepared to enter into a negotiation and avoid delays which result in the original agreement being extended because the organization was not ready to negotiate.  This is often times the point where organizations which are not prepared will bring in outside assistance to coordinate the competitive bid process and subsequent negotiations.  If you believe your organization needs external assistance, make sure that whomever you contract with is not only negotiating terms and conditions, but also provides an on-going vendor management model after the negotiation.

Lastly, I mentioned the importance of fostering a positive relationship with your supplier.  You want your account manager and his/her team to be the envy of the organization for account relationships.   Obviously the amount of revenue an account team brings to their organization is a major component in determining their performance within their company.  However, don’t underestimate the importance that suppliers place on their representatives to maintain healthy relationships.  Just as within your organization, you want your suppliers’ account team to be proud to be working for their company and proudly say they are servicing your company because, at the end of the day, your success is a result of performance – and support – of suppliers’ product and services.

At this point you’re ready to begin managing your vendors.  As we’ve seen, a successful relationship with your suppliers begins not with the contract itself but with the management of the agreement after it has been negotiated.  If you haven’t met with your suppliers recently give them a call and initiate your vendor management process by asking for an account review.  Before the review, draft a list of items you would expect them to cover when they walk into the room and then compare your list with their presentation.  You’ll quickly be able to identify gaps in your supplier relationship and use your list as a roadmap for obtaining better pricing and services from your vendor.  The results are guaranteed not only to surprise yourself but will result in new respect from your vendor.

Week In Review – Jun 27 – Jul 3, 2010

by Magesh Tarala on July 4, 2010

What can Cloud do for you?

by Marc Watley, Jun 28, 2010

The recent AT&T/iPad security debacle provided some sensational headlines. But that does not mean you should stay away from cloud computing. If you follow Marc’s recommendations in this post, you can adopt Cloud solutions to remain competitive and do so in a secure and highly available fashion. more…

Leadership and Mythology #8: Myth, Self-Discovery and Business

by Gary Monti, Jun 29, 2010

Tired of doing things you regret? Wonder why the behaviors continue even though they sabotage your position? Vacillate from submission to aggression when making business deals? Want to stop all this and just stay on your unique path? Wonder where the Hell that path is? Read this article to understand the three level of truth and how they tie to your Myth. more…

Social Media and Tribes #4: Tribal leadership

by Deepika Bajaj, on Jun 30, 2010

The word “tribe” has become part of the popular lexicon. If you have wondered what constitutes a tribe and how they function, this article is for you. People who end up as tribal leaders are the ones who leave the tribe better than they found them. more…

Flexible Focus #8: Memory is a slippery slope

by William Reed, Jul 1, 2010

Just like there is a learning curve, there is a forgetting curve. Without periodic review we forget what we learn and in a month’s time we retain only 20% of what we learned a month before. In this article William give describes how to use the Mandala Chart to improve retention. more…

Author’s Journey #28: Creating a marketing plan for your book

by Roger Parker, Jul 2, 2010

During the past 10 weeks, Roger’s post have covered different approaches to marketing your book, including list-building incentivesone sheets, and obtaining pre-publication quotes. This week’s article ties the previous 10 installments together and closes Part 3, Planning, by discussing the importance of creating a book marketing plan as early as possible. more…

3 Steps to making the Outsourcing choice

by Matthew Carmen on June 21, 2010

Outsourcing.  If you undertake this beast solely for financial savings, you will be disappointed. After a decade and a half of IT finance experience in the consulting, healthcare and entertainment industries, I tend to liken outsourcing to medicine:  The skill or portion of your business that you are looking to outsource is the headache, and the act of outsourcing is the aspirin.  In many cases, one has to be willing to spend extra money to get rid of the headache.  Spending extra money is not always the case, but when it is, it still could be the right decision in the long term.

It is now rare to find a company, of any size, that hasn’t outsourced some portion of their IT functions.  This could be as small as an application or as large as the company’s entire IT department.  So now you’re considering outsourcing within your own organization…but where to start?

Step 1: Once the CxO has signed off…

Once the CIO and/or CFO (hopefully with inputs from many other departments) has decided to look at the outsourcing option, where does the team – consisting of representation from finance, procurement, legal, operations, the user community and executive leadership – start?  As an example, let’s say a company is looking at outsourcing their mainframe environment:

The first thing that needs to be done is to figure out what assets the company has dedicated to its mainframe environment.  These assets might include:  applications (software), storage, facilities, labor and the actual mainframe equipment.  According to my colleague Brian Superczynski’s article, “More bang for your IT buck: Three keys to success”, published on March 15, 2010, well run organizations have accurate asset management, contract management, vendor management, activity based costing and other systems to make this an easy endeavor (my article  Lifecycle Management: Knowing what your company owns, how it’s being used, and where it lives, published April 12, 2010, delves into these areas more deeply), if not, there are many small and large consulting companies that can come in and do this assessment.  Most small and midsized companies do not have these capabilities in house.  Even large companies may want to bring in an outside expert to do this work, as to keep politics out of the decision making process, as much as possible.  Once this task is complete, the finance person assigned to this project will build a cost model, showing what the company spends on its mainframe environment.

Secondly, obtaining data on what other companies (similar to your size and/or industry) are spending on their applications, labor, storage, etc., is very valuable.  As with asset analysis, there are many companies out there that can provide this information –  Gartner Group and Forrester Research are two of the leaders.  Make sure to buy only the services that you need.  This information can get pricy, but it is definitely needed to make a sound business decision that will affect the company for many years to come.  This information, in conjunction with the corporate costs, will show where the negotiations with the outsource provider will take priority.  Labor is always high on this priority list, due to the fact that a provider should be able to do the outsourced activity more efficiently.

Step 2: Selecting and engaging outsourced solutions

Upon completion of Step one, the company is now ready to develop a Request For Information (RFI).  This task is usually performed by the procurement team, with help from operations, finance and legal.  This document is used to gauge the interest of prospective outsource providers.  By asking the right questions regarding the providers’ mainframe capabilities, the company looking to outsource can figure out who are the viable candidates, based predominantly on operational viability and sustainability.

Once The RFI has been responded to, hopefully by many outsourcing providers, the company will make some determinations on who they want to bid on the project.  What is becoming more and more popular is multiple outsource providers getting pieces of the outsource initiative – known as multi-sourcing – can come into play as well at this juncture.  Once the company knows who and how they want to bid on their outsourcing project, a Request For Pricing is developed (RFP).  This document, with many parts of the RFI document included, is meant for the vendor community to bid on the wants and needs of the company.  These wants and needs can get very complicated, the company looking to outsource may want upgrades to many of their applications and systems, that they cannot do themselves, or they might want equipment upgrades, etc.  These needs will add costs to the total vendor bid.

The vendors that choose to participate in this possible outsourcing initiative will respond to the corporate RFI/RFP – a timeframe you specify but usually within 30 to 60 days. Now is when the real nuts and bolts work starts.  Everything is a negotiation.  The company will need to decide what is a priority and what becomes secondary.  Service Level Agreements (SLA’s) must be agreed to, cost structures for outside work, i.e. new functionality, future usage, etc, need to be agreed to, as well as hundreds of seemingly minor points that if not discussed can come back to bite the company.  Once all the costs, service levels, etc. are agreed to, a decision can be reached.

Step 3:  Reaching the final decision

In order to reach a final decision, a business case must be built.  There is no set form in doing this, each company is different.  This business case needs to contain the information necessary to sell this undertaking to the decision makers in the corporation.  Financial models, growth estimates, industry information, etc all help make the case.  What the decision will come down to is where the ‘most bang for the buck’ can be realized.  Is the company getting the same services for less money?  Are more services provided for more money?  Are future costs controlled?  The answers to these questions in the business case will lead to a conclusion and facilitate the final decision.

Once the business case is presented, a decision is made.  Outsourcing may or may not make sense based upon all of the evidence provided.  If outsourcing does not make sense at a particular time, this does not necessarily mean it should not be looked at again in the near future.  The business environment or technical needs of the company may have changed, services pricing may have decreased, etc.  If outsourcing is the chosen direction, the company needs to put processes and people in place to manage the engagement in a positive way, in most cases this can be done through a reallocation of the labor that has been outsourced.  Issues will come up and having process in place will help mitigate them in a way that is beneficial to all involved.

I hope this information is helpful in your organization. Remember that this is a broad outline of the undertaking of an outsourcing relationship.  Each company will have different needs, levels of service, etc.  Make sure you have or contract the best expertise to provide all the information needed for your company to make the best decision for its business interests.  In most cases, outsourcing should only be considered for non-core activities, such as Information Technology, Customer Service, vendor management, etc.  Outsourcing can be a huge benefit to an organization on many levels, but should never be taken lightly; always make sure that due diligence has been conducted, sound planning exists, and ultimately that internal monitoring and coverage exists in order to address any issues that may arise.  It’s your business – fuel it properly to ensure success

Making the transition from spreadsheet-based Financial Planning and Analysis to a leading Enterprise Performance Management Solution (e.g., Hyperion, Cognos, etc..) requires commitment, executive sponsorship, and significant adjustment by those involved.  Before moving forward with haste, certain items should be considered to ensure a successful and sustainable implementation:

  1. Assess the Current Environment: Before a company can even consider beginning to scope out the analytical and reporting needs of a given organization, it is important to take a careful look at the current environment. Many organizations make the mistake of implementing analytical tools that only produce what is currently being used. The only difference may be a more complex user front end.  Doing this will not create any value for the organization and will only lead to frustration and a low adoption rate.
  2. Get to Know Users and Understand User Needs: It is important to meet with the key people in the organization that will be using or relying on the new tool to make business decisions.  Approach these conversations in a way that opens the door so that they are intricate in the design and development.  Keep in mind, fulfilling the needs of the Finance is important, however, providing a tool that has the power to directly impact the business and profitability is the goal.  It is important to have a strong executive sponsor of the project which will assist with driving the project and promoting it through-out the executive team of the company. However, receiving input from the data experts / users of the data will lay the foundation for a useful tool which will have an impact on the day to day operation and management of the company.
  3. Identify Key Performance Indicators (KPI’s): During the discussion with management and the users in the organization, it is not only important to understand the business drivers, but also being able to measure business performance by applying KPI’s.  KPI’s need to be measurable, but one simple aspect to keep in mind, is they should be useful. Don’t overwhelm your user base with complex KPI’s that do not add value.  During your information gathering sessions you should be able to get a feel of what is needed, and you may find in most cases there is a common theme.  Some examples of KPI’s include:
    • Profit and Loss
    • Inventory Turn
    • DSO (Days Sales Outstanding)
    • Customer Loyalty/Attrition
    • Market Share Indicators
    • Other relevant measurements
  4. Good Project Management Skills Are Key: Once the information gathering sessions are complete and a signed-off proof-of-concept is in place, it is time to create a Statement of Work (SOW). The SOW is a detailed road map of the project. While drafting the SOW, it is important to keep in mind that you are providing a solution to an existing problem. Therefore it is important not to over complicate as this will only create resistance and lack of acceptance. When drafting the Statement of Work, the following should be defined:
    • Project Scope
    • Risks identified
    • Timelines defined
    • Any additional terms of the project

It is a good practice when managing a project of this scope to schedule weekly update meetings and to track the progress of the project to ensure that key deliverables are being met. This will keep the project in line with goals and timelines detailed in the SOW. Lack of diligence can most certainly result in an overage in project budget and delays in implementation. Some others points to keep in mind include:

  • Implement in phases and conduct User Acceptance Testing along the way.
  • Ensure proper training is made available not only users, but the administrators of the new tool.
  • Do not over complicate. In some cases, less is more. Provide a sustainable, usable system that can provide standardized reporting, yet have the flexibility to provide ad-hoc analysis as needed by users.

There are many styles to managing a project in the IT or Finance world. Information Technology people have their own style, understanding, and expertise. Finance and operational people have the ability to bring a different angle that is also very important to a successful implementation. Using the items detailed above as a guideline and engaging the necessary key people upfront, will make a big difference in the success of the project.

From the time the idea of a company was developed, those who control the purse strings (finance) and those who manage the income (sales, operations, and marketing) are often adversaries.

A frequent igniter of these tensions is a situation where an operations or business group wants to quickly move forward with a project (XX optimization, for example) which requires a capital investment.

Before approving funding, however, the finance organization must complete its due diligence by quantifying the benefits outlined in the business case. This timing gap often creates a bottleneck and uncertainty about the projects’ implementation and/or timing.

These bottlenecks can be avoided by all stakeholders working together to build a strong, interactive relationship around the project.   Keys to building this relationship are education, communication, and ultimately, including the finance team in your project.  The capacity to master the first two skills will lead to your finance organization becoming a trusted advisor and consistently being invited to serve as an active participant in your strategic initiatives.

Education

It’s a two way street.  With over a dozen years of providing strategic financial support, I have consistently found that education is the first step in building bridges to a better working relationship.  It is as much a necessity for the financial person to understand what the operations groups do, and vice versa.  While working at a for-profit healthcare organization, I held a weekly course for 10 weeks in order to educate the IT infrastructure group management team on the objectives of the finance group and how a working knowledge of finance objectives can add value to the IT organization and help them – and the company overall – to become more successful.  Once the course was completed, the IT management team understood why and how their involvement in budgeting and financial planning is important to the company’s operations, why their participation in the ‘month-end close’ process is crucial to meeting the goals of the company, and also why the building of business cases for all projects is essential for long-term financial planning and overall success.

I have also found that, from the financial team side, learning what the operations groups do, and how they do it, is vital to the success of a financial analyst.  By fostering an active relationship with my ‘customer’ – the operations team – and understanding how they manage IT facilities, call centers, or manage hardware environments, I was consistently able to develop a better relationship with these supported groups – and we always celebrated our successes together.

Communication

This begins with the education phase and continues to build a foundation of trust.  Once the financial representation and the operations groups understand what the other does, it becomes easier to support the others’ efforts.  The key to effective financial communications is to remain consistent with operational or business partner requirements, and to be cognizant of the execution of new requirements and their execution. Make no mistake – the execution of these objectives can be difficult at times; this means the month-end close process must run the same way each month, and the systems of the budget process are changed as little as possible each year.  The information required to develop a business case is the same, regardless of the project.  In the event any strategic change does occurs,  any corresponding  changes in financial requirements need to be carefully considered and communicated so as to not to compound further disruption to the organization. Once consistency is achieved, the analyst and the group he or she supports can get to real work, the work of optimizing the business and reaching the ultimate goals of the company:  profitability, social goals, etc. This is the trusted advisor stage.

The trusted advisor

This is the ultimate goal of the financial representative, and where the fun begins.  As an analyst, I remember my colleagues consistently stating that the most boring part of their job was the “regular” work.  My experience is, once you have a system in place for achieving positive results in a routine activity such as the month-end close, that task often becomes mundane. For a corporate finance person, the interesting work is that which includes participation leading to realizing corporate goals.  Ways in which the financial analyst can participate in this process include performing lease vs. buy analyses for new equipment and software purchases, finding savings within a project, conduct audits to make sure the company is ‘getting what it pays for’ from each of the many vendors and service providers, and also establishing metrics and key performance indictors (KPIs) to put dollar figures on operational measurements and use this information to make key business decisions, etc.  Serving as a trusted advisor to the operations management team can be exceptionally rewarding; it allows an analyst to be creative and to develop solutions that help to both ensure a successful project and contribute to the company reaching its goals.

Achieving the role of trusted advisor and building that relationship between finance and the operations groups is important to the success of the entire organization.  The more adversarial the relationship, the more difficult it becomes to complete the work – both the monotonous (yet necessary) work and the creative solution work.  Once these barriers are eliminated – from either the operational or financial end (or both) – all jobs become easier, more efficient, and much more rewarding to each employee.  Motivated employees will not get excited about doing the same job every day. To them, variety and professional growth are the spices of life, and job functions in all areas of the company become more efficient when the relations between all groups within the company are high

Achieving IT Financial transparency with activity based costing

by Brian Superczynski on April 26, 2010

Transparency of IT costs continues to gain momentum as a shared strategic goal between business units and their IT organizations.  It is therefore no surprise that Activity Based Costing (ABC) or activity based cost accounting has become a popular methodology to track spending beyond standard accounting codes to provide greater transparency to IT cost drivers.  Spend with ABC is not just a tracked by dollars and cents, but by function, portfolio, location, application, or any other way that is meaningful to the people ultimately paying the IT bills.  A successful implementation of ABC not only includes the “nuts and bolts” of implementation but also identifies responsibilities for socializing the results and providing actionable findings and suggestions.

IMPLEMENTATION CONSIDERATIONS:

Creating an assessment of how costs and metrics are currently tracked within an organization is critical in determining how quickly an ABC system can be implemented and then creating a maturity roadmap.  As an example, tracking resource costs and what those resources are working on is an important component to providing transparency to application development and support.  A mature organization may have a time-keeping system already in place to segregate their personnel costs.  However, even companies that do not have a formal time-keeping system in place can simply use cost centers to identify labor costs by application or project support costs.  The point is – options always exist to apply costs and your metrics to the cost drivers within your organization.  Another common assessment that will need to be performed is to identify how your organization tracks system utilization (MIPS– Million Instructions per Second, OLTP – On Line Transaction Processing, etc).  Once these assessments have been performed, you can put a system and reports in place to provide transparency to your cost structure and also define a roadmap for improving your metrics gathering.

SAMPLE OF ABC TRANSPARENCY:

A common ABC system implementation may track costs by

  1. region or country,
  2. location within the region/country,
  3. portfolio or function, (application, operational group, etc) and
  4. Expense or Capital account code.

Using network costs as an example, the ABC output will show how network costs vary by region down to the labor, transport and equipment costs.  This allows business units to compare their support cost with other units and if appropriate, even benchmark their internal performance.

SOCIALIZATION OF TRANSPARENCY:

In order to insure activity based cost accounting is not just another finance owned exercise to show executives and business units another way to slice the IT budget there must be joint ownership with IT leaders in explaining the results.  It is therefore imperative to structure your activity based accounting system in a manner which coincides with how the IT organization is structured to deliver services and implement new initiatives.  Many organizations today utilize a type of functional or “portfolio management” structure to align IT service delivery with the business units they support.  As an example, an IT organization of a full service banking institution would have units which are responsible for delivering services and understanding the needs of three separate lines of internal businesses or portfolios:

  1. Commercial and Private Banking
  2. Commercial and Home Loans
  3. Brokerage and Investment Services

In this example, the activity based cost accounting would be structured in order to explain the costs associated with operating systems and applications that support these specific lines of businesses.  The portfolio manager would work jointly with the finance organization to translate the activity based cost accounting results in a manner which will provide transparency to the business units.  Furthermore, the reports would be structured in a manner which would provide the business units with options or “levers to pull” to modify and thereby reduce the costs of the services provided by their IT organizations.

When implemented properly, ABC is a tool that can be used by all levels of management to make important decisions in a more educated manner.  When used in conjunction with operational metrics, results including best practices and efficiency become known… and from this point; true organizational improvement can happen.

One of the best ways to keep Information Technology (IT) costs to a minimum is through a systematic  undertaking known as Lifecycle Management.  A successful implementation will make it easy for IT, finance and the user community to know many vital pieces of information and be able to act upon them.  The knowledge that becomes known is:

  1. What the company owns or leases (hardware, software and services)
  2. What the company uses and where it is, and
  3. Is the company getting what the vendor has promised (bang for the buck).

The main key to success is sound process.  This cannot be stressed enough, hard work in the planning and implementation stages will reap huge benefits once your lifecycle program goes into production.   The more operational groups within the company that you can include in your planning stage, without giving them say over the ultimate solution, the more useful your lifecycle program will be.  An example of this is including the finance group in the planning process.  With the participation of the finance group, the lifecycle management system can ultimately feed the company budgeting system, making the budget process more efficient.

Stage 1:  Contract Management; What does the company own and lease?

It may surprise you that many companies cannot answer the simple question: What IT assets (hardware, software and services) do you own and lease?  By being able to answer this question, costs (potentially millions of dollars depending on the size of your organization) can be saved and reallocated to other corporate initiatives.  This is achievable through weeding out expired leases, eliminating hardware maintenance that is no longer applicable and the write-off of corporate software and hardware assets that are no longer in use.

The easiest way to start getting this information is to look at the previous year’s payments – accounts payable.  This will let the person or group managing this process to see what vendors the company is doing business with.  This action should be followed up by an inventory of that file cabinet full of contacts that no one ever opens.  Once inventoried, each vendor should be contacted to make sure all agreements in place are known and copies are on file with the contract management project.  This allows the second phase of contact management to happen, building a usable database.

Ideally, the database being built will eventually be used to inform IT managers that the equipment they use is coming to the end of useful life whether owned or leased.  Secondly, on the software side, managers will be informed when annual maintenance is due, how many licenses are owned, and by tying the asset management system, talked about later in this article, how many licenses are being used.   By getting this information early, managers in all areas of operations can make informed decisions and have time to act upon them; ultimately saving money by lessening the frequency of late payments and owning what you are using and planning to use in the near future.

Stage 2:  Asset Management; What does the company use and where is it?

Knowing what your company uses and where it is located is as important as knowing what you own.  By knowing these facts, groups both within and outside of IT can more effectively budget, plan and allocate resources.  Examples of this include: 1) The data center facilities group can more accurately plan for power expenditures, floor space usage and eventual expansions of the data center environment, if they know what equipment is being used and where it is located;  2) The disaster recovery group can plan their activities more effectively when they know exactly what equipment is being used and what software and applications are running on it;  and lastly 3) By knowing what is running on servers and the percentage of usage, etc.  Equipment can run at a higher usage level and put the purchase or lease of new equipment further into the future.

For larger enterprises, it may be cost effective to hire a company to do a complete physical inventory of its IT assets.  The results of this physical inventory can be analyzed against the information acquired in the contract management activity and then analyzed against the company’s IT department’s system wide device finding software (i.e. Microsoft, HP Open system, and various other vendors).  The asset management team can then work to figure out the differences between the three systems, which should not be more than 15% of the total assets.

On the software side, there are many agent and agent-less products that can be put onto the company’s network to discover what is running on each piece of equipment the software can see.  With the data that is provided, analysis can take place between what is owned and what is being used.  You may find that through many projects over the years you now own, say, 15,000 licenses of a certain software, even though you only have 10,000 employees.  Action can be taken to cancel the annual maintenance on unused licenses and write-off the non-depreciated capital expenditure associated with the purchase of the software.  You may also find that you are under-licensed on certain software applications, so be prepared to have some expenditure offset the overall savings that will occur.

Stage 3:  Vendor Management; Are vendor promises being kept?

This portion of lifecycle management is the most subjective.  Measuring if a vendor is truly providing what they say they are is complicated.  Metrics and Key Performance Indicators (KPIs) need to be developed for each obligation each vendor has signed up for.

Example:  If a PC vendor makes the claim that your company will get 20% longer life from their product, as opposed to its competitor’s product, metrics and KPIs need to be developed so that the results can be reported on either monthly or quarterly.

Hopefully your analytics came to the conclusion that your vendor is living up to the agreement it signed, which is usually the case.  If the vendor is not living up to it obligations, there could be many reasons.  These reasons include:  1) scope of work was not completely known at time of signing, meaning that failure to live up to its obligations are partially the fault of the customer, and just as likely 2) the vendor made claims it could not live up to, just to get business .

There are many ways to report vendor management information.  I have found that the most effective way is a simple dashboard, a quartered one-page report that shows all pertinent financial, contractual, usage and service information.  Once approved by corporate powers, a scheduled meeting takes place and the findings are presented to the vendor.  If vendor is living up to contractual agreements, future strategy or other topics may be discussed.  If the vendor is not providing its obligations, a discussion of why will definitely occur, followed by ways in which improvement can be made.  This is not necessarily a bad conversation, new understanding of the relationship will definitely take place and the corporate relationship will become stronger though the process, as long as positive results ensue.

Conclusion:

The steps listed above need to be tied together, resulting in an interface which brings all the information to a usable form. This is crucial.  Once this happens, the magic starts: managers are able to make informed decisions, leased equipment is returned on time (instead of having its monthly payment made for years on end) and overall, IT costs are minimized.  The company only pays for what it is using and at the end of the day, controlling costs while providing needed services, is the name of the game.

More bang for your IT buck: Three keys to success

by Brian Superczynski on March 15, 2010

Many companies do not have the luxury of providing dedicated financial support to their Information Technology (IT) organizations, which often results in a struggle to understand IT cost drivers and savings opportunities.  This struggle has become more evident as companies increasingly rely upon effective IT to drive operational efficiencies while simultaneously expecting IT units to reduce operating costs. This paradigm often results in the CIO seeking a liaison between IT and corporate finance in order to help provide transparency of technology costs as well as to identify the value proposition of all IT services. Identifying meaningful savings and efficiencies in your IT environment begins with a partnership between the technology and financial support units.  Preparing for these conversations requires an understanding of how to build a successful partnership between IT and corporate finance – the foundation for which begins with three related key practices:

Applying traditional financial management practices with the IT disciplines of vendor and asset management.

FINANCIAL MANAGEMENT:

The key to world-class IT financial management is coupling financial processes to your technology infrastructure and the organization’s strategic technology roadmaps.  Effective financial management ensures the IT infrastructure is obtained at the most cost-effective price, while providing the organization with a deep understanding of its IT services costs.  In many instances however, the most cost-effective price may not necessarily mean the lowest price; depending upon availability requirements and other demands placed on technology.   Financial transparency must therefore exist in order for the business to understand the tradeoffs between price and performance.

VENDOR MANAGEMENT

This price and performance tradeoff was painfully evident following one organization’s switch to a well-known personal computer supplier, which was initially calculated to save the organization millions of dollars.  Not surprisingly, the finance organization was quick to identify how the new agreement would reduce expenses in the following year’s budget.  However, those savings quickly evaporated after the supplier experienced a 20% failure rate on over 100,000 devices, which had been in service for less than a year.  Obviously, managing your suppliers not only includes obtaining the best price but also monitoring the quality of the product or service being provided.  This is why continually monitoring your relationships and agreements with suppliers (and including your finance organization in this process) is often your first and best opportunity to identify operational inefficiencies and IT cost savings.  The end result will not only mean achieving better price performance from your technology assets, but also will improve the reputation of your IT organization to provide a quality product at an explainable and predictable cost.

ASSET MANAGEMENT:

Keeping your technology assets current also requires active management of these assets:   An effective asset strategy not only tracks the asset but takes into account the lifecycle of the product from procurement to eventual disposition.  For example, leasing is a common asset and treasury strategy found in IT because it frees up cash flow associated with large capital purchases.  I’ve witnessed on numerous occasions leases being subsequently bought out because the technology owner was not made aware of the lease and was not prepared to replace the technology at end of term.  These pitfalls can be easily avoided by linking asset strategies with technology roadmaps and the organization’s budgeting process.

These three practices may appear straightforward, but in order to be successful they require the constant collaboration between your finance and technology organizations.  The application of financial, vendor, and asset management methodologies will keep your IT organization on track to realizing operating efficiencies while also optimizing operating costs.

Stay tuned: Our next few posts, we (my fellow Datacenter Trust teammates and I) will delve deeper into each of these key three areas as well as other topics on IT finance.