Risk is defined as uncertainty of outcome, whether positive opportunity or negative threat.
Managing risk is generally considered important, although many organizations do not perform risk management with a visible, repeatable and systematic approach. In the context of risk management, problems can be defined here as the underlying causes generating uncertainty of outcome – in other words, risks.
A consistent and generic framework for risk management is described in Figure 6.25. This is the approach suggested by M_o_R, Management of Risk methodology from OGC.
Depending on the size of the organization, its maturity in IT financial management practices, the target scenario and many other factors there can be several problems while implementing or improving IT financial management. Risk management, defined as the task of ensuring that organizations make cost effective use of risk handling activities, is recommended for projects and programs to minimize the possibility of failing to achieve desired outcomes and targets.
In the following part of this section, we will analyze the most common problems generating risks while implementing or improving IT financial management. Properly managing these problems is the challenge and therefore the critical success factor of any implementation.
One of the typical and most critical problems is faced by organizations in Scenario 2. The temptation to re-use existing tools, activities and skills may be very strong and lead to considering the service dimension simply as a new reporting topic. Financially managing IT services cannot be simply done by means of apportioning Indirect Costs. It requires a new approach, where an appropriate proportion of cost is directly assigned to IT services; this can be incompatible with the pre-existing arrangement and its supporting systems. Organizations should recognize this
Identify the risks
Identify probable risk owners Embed and review
Define a framework
Gain assurances about effectiveness
Implement
responses Evaluate the risks
Set acceptable levels of risks (tolerancey/‘appetite’)
Identify suitable responses to risk
Risk analysis Risk management
Figure 6.25 Generic framework for risk management (M_o_R, OGC)
potential problem as soon as possible and should analyze carefully the risks related to keeping the existing approach.
Another problem derives from the length of the project, which will take a long period of time (from six to twelve months) to be completed. During this period it will be necessary to keep senior management commitment and attention high; this is normally the task of the project board. Attention and commitment should also be raised at lower levels of the organization by all those affected and involved in the new activities. Staff should understand the importance of recording timesheets on schedule or of being precise with data entry and should be collaborative.
At operational level, the effort of running financial management functions could increase, but this would be balanced by savings deriving from valuable and reliable reporting or from better decision-making. These benefits are experienced mainly by management and therefore the introduction of the new IT financial management functions can be unpopular. To limit possible problems and impacts and to maximize the level of support it is important to start the awareness campaign from the beginning of the project (see 6.3.2), to continuously monitor staff opinion and to intensify communication when needed. “Quick fixes” are effective, such as premiums for employees or, at least, allocating key roles in the project.
Skill of resources is perhaps the most important topic. It is not easy to find the right mix of skills, which should include both financial management matters and IT knowledge. It is usual to find experienced accountants with little knowledge of IT or IT resources with no knowledge of financial topics. Finding suitable resources is usually the biggest challenge for project and process related roles, and the main reason for failure or unsatisfactory results. The project team should not only be competent but also properly empowered by top management. Assembling the wrong people or missing empowerment will have a negative influence on the quality of results and generate relevant problems such as:
• IT accounting and charging that is over-complex or ineffective
• IT accounting and charging activities that are so elaborate that the cost of the system exceeds the value of the information produced.
Impact in terms of effort is another problem that is often underestimated. Managing information about a detailed cost model of IT may require additional effort compared to the situation in place before its introduction. Effort related to the project is normally considered and evaluated but impact on the roles responsible for running the day-to-day activities and, most of all, on those peripherally affected (such as roles managing passive cycle activities) is often under estimated.
An example that has been mentioned before is the impact on passive order entry. The definition of the cost model may complicate the structure of the orders and create additional lines to be managed. This impact of this should be carefully evaluated and discussed with the purchasing department.
Another issue may reside in tooling. Because of initial lack of knowledge or budget pressure, it is often believed that the existing tool(s) supporting financial management will fit and support IT financial management as well. This is possible, of course, but it does not always happen depending on the rigidity of the existing software. Advanced and newer solutions will enable different arrangement of information and needs (such as apportioning) but, typically, older accounting software or closely integrated solutions, such as ERP systems, will probably have
difficulties. This issue should be investigated as soon as possible. Another typical problem about tooling comes when discussing the benefits of IT financial management, such as those promised by investments analysis for better decision-making. Many of these benefits become possible as far as tools properly support the underlying processes. Charging is another typical area of issues when it is based on prices and the resources used. In this case tools should be available, typically in the domain of monitoring, flexible enough and interfaced with the charging module to provide all the required information. Often this does not happen and further investments become necessary.
Chapter 8 will explore the tooling topic in more detail.
Finally, an overall underestimation of IT financial management complexity and related difficulties is a frequent error. It is often considered one of the easiest service management practices to implement. After all, organizations have been doing budgets and accounting, including IT aspects, for many years and they often consider what they have to be sufficient. This is likely to be true for Scenario 1, but when moving to Scenario 2 or 3, IT financial management should be considered as a totally new practice and careful attention should be given to it. Failure to understand the increasing difficulty and specific requirements of new scenarios is likely to lead to allocation of insufficient budget and underestimates of the effort necessary to achieve them and, as a consequence, into project failure.
Besides the general problems related to the project, previously described, there are other possible problems:
• Some relevant practices, such as planning, Service Catalog or capacity management, may be not mature enough and supplying the needed information. For example, for organizations attempting to implement Scenario 2, if the Service Catalog is not well designed or widespread, defining the correct apportioning model and reporting may become very difficult and the results will probably be unsatisfactory.
• Senior business managers may not recognize the benefits of IT accounting and charging and may resent the administrative overheads and the workload of related activities.
• The IT organization may not be able to respond to changes in users’ demands once costs become an influence.
• The monitoring tools that provide resource usage information may be inaccurate, irrelevant or cost too much to develop and maintain.
7 Managing finances