IT Finance 101 – six key principles you should know

By Colin Rowland, SVP EMEA at Apptio

Technology now permeates almost every aspect of our personal and professional lives. The same people who use AI voice-assistant speakers and upload photos to the cloud are bringing their skills and interest in using technology to the workplace. As a result, employees from across the business, not just IT, are displaying a higher level of technological acumen and enthusiasm than ever before, driving businesses to use tech in new and interesting ways.

Yet with this vision and enthusiasm comes an increased level of responsibility. Everyone across the company needs to have an understanding of how IT costs influence the business to avoid using a large portion of critical IT budget to embrace innovation for innovation’s sake; to determine what tech trends will drive real business value and which are simply hype. This is especially important to the CIO, the CFO and the finance team, but also to business unit leads, the head of sales and marketing, and even the CEO.

Technology business management (TBM), which is a practice providing standards and best practices for how organizations can manage IT as a business, helps organisations to accomplish this more effectively. However, many companies do this already, even if they don’t realise it. By actively applying the financial principles of TBM, IT and business leaders can gain a clear understanding of how IT costs work.

Here are six key principles that TBM users should keep in mind to help manage their IT costs:

  • The matching principle

When trying to keep track of IT costs, it’s important to match the cost of an item to the time that you experience the benefit from that item, whether it’s a contractor, a software licence or even a new laptop.

This helps when analysing costs and benefits in the long run. Say you implement a host of new software in November but aren’t invoiced until January, and don’t pay until February. You may see gains in productivity throughout November and December, but when assessing performance later on, the cost impact of that productivity boost isn’t so readily apparent.

Because technology use is so widespread, being able to quickly identify and associate costs to benefits is vital to ensuring IT remains efficient, rather than having to spend time looking back and matching up costs and services.

  • Capital vs operating expense

Capital expenditure (CapEx) and operating expenditure (OpEx) are common financial concept relating to the cost of buying something with a life longer than a year (a printer, server or software licence) vs the ongoing cost of running the business (subscribing to SaaS, consuming a cloud instance, keeping the lights on).

Different businesses weigh more heavily towards CapEx or OpEx in their wider financial approach depending on their business model, but it’s vital to assess your IT business to see what its own split ought to be. Your overall business may be more asset intensive, but should you be shifting your IT spend to OpEx to become more flexible through technologies such as SaaS and public cloud?

  • Fixed vs variable expenses

When assessing IT OpEx costs, it’s vital to have a clear understanding of which IT expenses are fixed and which are variable. Internal labour, server leases and depreciating/amortising assets should always remain at a fixed cost regardless of usage, while contract labour, cloud services and rental fees can vary month to month.

Businesses can use this categorisation to assess their IT agility by measuring the ratio of fixed and variable costs. With this knowledge, agile businesses can look to quickly wind down their cloud usage in a month where there are pressing budget needs, or easily reallocate spend at times when demand for variable services is low without having to trawl through all their expenses.

  • Depreciation and amortisation

When paying for assets out of CapEx, depreciation and amortisation can often be a good way of measuring the effectiveness of both physical and intangible IT assets by spreading out the cost through monthly payments from the OpEx budget. Incorporating elements from the matching principle, this allows costs to be quickly and efficiently measured against the benefits.

However, it’s important to continually account for this when using IT assets. With the pace of digital transformation, it’s often tempting to turn off resources to save costs, which can cause the remaining depreciation/amortisation to hit the OpEx at once, resulting in budget shocks.

Instead, businesses need to balance principles three and four, and when looking at turning off assets should consider whether it would be beneficial to repurpose them for the remainder of their lifetimes.

  • Direct and indirect costs

When making the final decision on how to pay for an IT asset, knowing if a cost is direct or indirect helps to ensure that it’s attributed correctly. Some costs can be 100% dedicated to a single service or system in IT, such as a new server with a single application, or a new printer for a department. This makes it easier to apply the cost to a user, making for a transparent IT system.

Other costs, such as the lease on a datacentre or network monitoring, aren’t directly attributable to a single service. These indirect costs require much closer scrutiny to assess where the benefit from the asset is being felt most, and as such, where much of the cost should lie.

  • Allocations and cost recovery

Indirect costs and ever-evolving IT demands mean deciding how to allocate or charge back IT spend across the business can prove a challenge. Should it be an even spread across BUs, by head count per BU, or by revenue per BU?

There’s no single correct answer, and different businesses will benefit from different models. For example, some businesses which rely heavily on CapEx for their IT expenditure may benefit more from an even spread model as costs remain static, while businesses with fluctuating OpEx costs may want a revenue-based model.

Ultimately, this is a business’ end goal. While following the other five principles and gaining a clearer picture of your IT costs and drivers, the allocation principle should be used to apply the cost efficiencies across the business.

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