Uncover the secrets of successful IT financial management
Information technology (IT) is a major organizational investment that generates some of the most significant expenditures for any company. Cloud costs, security, and software licensing all represent substantial financial commitments. Each investment must align with an overarching strategy to maximize the return on investment (ROI).
To ensure the most bang for their buck, companies adopt IT financial management to optimize spending, provide transparency, and establish the value of the technology they rely upon for success.
What is IT financial management?
Information technology financial management (ITFM) is a framework of tracking, analyzing, and optimization practices that dictate a company’s IT budget. It provides visibility into how much money the business spends on IT, identifies waste, and aligns investments with long-term corporate goals.
At its heart, the IT financial management process involves budgeting, accounting, charging, and monitoring costs relating to the following:
Assets
Resources
Projects
Services
These activities cover operational expenditures (OPEX), like staffing and cloud subscriptions, and capital expenditures (CAPEX), like new hardware and infrastructure costs.
Key objectives of IT financial management
At first glance, you may think the purpose of IT financial management is to establish budgets and cut costs. Although the ultimate goal is to minimize spending, it’s about more than placing a lock on financial reserves. ITFM contributes to overall corporate success in the following ways:
1. Allocating resources
ITFM allocates spending on IT resources everywhere within the organization, including shadow IT. Expenditures include:
Hardware
Software
Personnel
Outsourcing
Disaster recovery
Occupancy costs
2. Zeroing in on waste
ITFM gathers granular data on every IT cost, such as:
Applications
Vendors
Resources
Management can use this data to target and eliminate redundancies, obsolete tools, and other unnecessary expenses. Along with generating cost savings, eliminating outmoded technology boosts productivity.
3. Establishing accountability
Because every expenditure is tracked and tagged, ITFM increases financial accountability within the business unit. The process also requires justification for every purchase, establishing an oversight protocol that discourages unnecessary expenditures and aligns spending with strategic goals.
4. Increasing accuracy
ITFM creates an archive of historical cost data that uncovers departmental spending trends. Management can use these insights to identify seasonal fluctuations, project costs, and other variables, improving budgeting and forecasting accuracy and minimizing overspending.
5. Effective negotiation
Historical supplier and subscription data allow management to understand contract value totals and usage volumes. With evidence in hand, the department is better positioned to negotiate vendor discounts and optimize third-party contracts.
6. Maximizing value
ITFM helps organizations identify underutilized or unused tech while establishing the feasibility and profitability of IT projects. With a complete accounting of IT tech and equipment, management can optimize the system, eliminating wasteful spending and avoiding further expenditures.
Benefits of IT financial management
An IT financial management strategy benefits the entire organization in several ways:
Improving the bottom line: By equipping the IT finance team with tools and insights to efficiently manage its budget, ITFM recovers costs and frees funds. This surplus cash can be reinvested in the department or allocated to other business areas in alignment with long-term goals.
Reducing risk: ITFM empowers CFOs to make evidence-based decisions with historical data, removing the guesswork from financial planning and reducing overall risk.
Improving ROI: A clear view of IT spending lets the CFO accurately gauge its impact on the company’s financial health.
Boosting fiscal responsibility: ITFM allows CIOs to accurately assess the strategic business value of IT’s technology service portfolio. With this information, they can make informed choices about IT investments, aligning them with digital transformation objectives.
Facilitating collaboration: The visibility and transparency offered by ITFM allows business leaders to work together and align investment with strategy.
Roles in IT financial management
Depending on the organization, one or more executives may contribute to the fiscal health of the IT department. These positions may include:
Chief Information Officer (CIO)
The CIO manages the delivery of IT activities. They’re responsible for governance, standards, rules, and procedures. They oversee the following functions:
Operations management
Service management (ITSM)
Asset management
Risk management
The CIO is an executive position that works closely with the Chief Financial Officer and the Chief Operating Officer (COO).
Chief Financial Officer (CFO)
The CFO is responsible for the business’s finances, including IT, and acts as a controller or treasurer. Duties include the following:
Tracking cash flow
Directing financial planning
Analyzing business performance
Recommending strategies to improve financial results
Ensuring accurate financial accounting and reporting
IT Director
The IT director is the bridge between the CIO and the IT staff. They’re tasked with the department’s day-to-day operations, acting as a team leader and enforcing guidelines or regulatory policies established by the CIO and governing bodies.
Best practices for IT financial management
Effectively managing an IT department’s budget is challenging. It requires the right processes, tools, and discipline to suit the company’s needs. With that in mind, here are some IT financial management best practices to set your organization up for success:
1. Lay the foundation
Ensure IT reacts and operates from the same financial perspective as the rest of the organization. Once aligned, consider ROI, total cost of ownership (TCO), and business goals to develop rules covering all IT spending scenarios, including:
Policies
Procedures
Tracking mechanisms
Financial reporting structures
Once in place, establish accountabilities for each step of the process and institute budgets, forecasts, and approvals to govern future spending.
2. Inventory
Review and itemize all IT hardware and software assets – including staff, costs, and utilization within the business. This information will assist in cost monitoring and inform future IT maintenance and improvement budgets.
3. Monitor IT spending
You could use spreadsheets, but purpose-built tools exist to streamline the process. Leverage IT financial management tools like Apptio, Showback, or Chargeback to automatically track and analyze expenditure data so you can identify waste-cutting opportunities and optimize cost allocation. Organize real-time expenditure updates by category, department, and vendor to monitor trends and inform spending practices.
4. Regular reporting
Schedule regular spending report delivery according to business and IT leaders’ needs. Updates should include information on ROI and goal alignment. Gain transparency into spending by breaking it down into categories, such as:
Departments
Projects
Asset types
Other cost categories
5. Prioritize accountability
Tagging and tracking every IT expenditure builds transparency and establishes accountability. The data will establish informed decision-making practices and improve the accuracy of budget forecasting, reducing overruns.
6. Align with business goals
Establish processes that encourage collaboration between the IT department and other business units by linking IT budgets and strategic roadmaps to business goals and objectives. This practice ensures IT investments map to current and future corporate priorities.
7. Consider the future
Hold regular meetings to communicate upcoming plans and prioritize future business objectives and technology requirements. Managers should be empowered to allocate resources efficiently while mitigating conflicting priorities between departments.
Steps to build an IT financial management framework
Successful IT financial management within an organization requires a collaboration between the CIO and CFO, plus input from IT leadership to develop a budgeting framework.
Here’s how to do it:
1. Define alignment
Review current business priorities, objectives, and projects. Then, ensure IT financial investments align to support them. Establish processes to monitor alignment and account for realignment efforts when necessary.
2. Review current state
Create an inventory of IT the following elements across all business units:
Assets
Vendor contracts
Resource allocation
Spending
Include issues or conflicts within the current IT environment that challenge productivity and efficiency so stakeholders can develop plans to address them.
3. Model the ideal architecture
Envision an idealized IT environment with everything necessary to support maximized business operations, including departmental needs, costs, and timeframes, but constrained by budget considerations.
4. Evaluate build vs. buy options
Considering each component of the optimized IT architecture, determine whether your organization prefers to build solutions in-house or source them from third parties.
5. Set the budget
Once you’ve analyzed the options and aligned the strategic roadmap with organizational priorities, establish the budget to inform purchasing decisions for IT resources and solutions. Base these expenditures on departmental spending data, projects, asset types, and other factors.
6. Implement controls
Ensure business processes remain aligned with the budget by implementing cost controls, such as:
Usage tracking
Chargebacks
Approvals
Audits
7. Continuous improvement
Establish timelines for regular budget reviews to analyze trends, adjust forecasts, and realign priorities. These routine evaluations also allow the team to discuss new optimization opportunities.
Enhancing IT financial management with Tempo
Effective IT financial management is much simpler with the right tools. Tempo’s Financial Manager for Timesheets allows teams to track budgets and expenses while identifying project trends with real-time views. Tempo also has application portfolio management solutions to break down communication silos, align strategy with execution, and inform decision-making.
With a practical IT financial management framework and the right Tempo tools, your organization can maximize its technology investment and better support company initiatives.
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