Wednesday, 17 March 2010

Performance = Revenue, Capacity = Costs

We industry professionals would do well to remember that in collaboration, our work as a team is often counteracting each other.  I sat in one meeting recently between two SAP Architects and the Data Centre manager.  The Architects main focus was on delivering the next project on time, and with good performance.  The Data Centre manager was under pressure to cut costs.  (Essentially, this classic struggle is often the reason for virtualization programmes).

To regain our balance, we must for a while think like a CFO - and get the biggest picture.  What does this mean?  It means, we must balance performance and risk against controlling and managing expenditure.  IT Services will make or save the organisation money - but balancing that against cost is an imperitive for the CFO. 

Why isn't this imperitive more pressing?  Well, the answer is - that it is - to the CIO.  He's under pressure to cut or contain costs, whilst continuing to deliver acceptable service quality - and find buget for new projects.  However, don't underestimate the complexity of this challenge.  Often times the CIO is struggling to get to grips with the finances of his operations, and his headache is getting worse with the competing perspectives coming out of his team. 

This is where Financial & Capacity Management can help
By combining (1) a thorough understanding of IT asset utilization against (2) service portfolio and configuration and (3) financials of operating capacity we can help the CIO to reduce overheads, whilst maintaining critical IT capacity and service performance. 

What does this mean?

It's a new level of maturity. 
It's not ITIL Capacity Management. 
It's not ITIL Financial Management. 
It's not Performance Engineering. 
It's combining all these disciplines to help the CIO - and the CFO make some sense of the world, and answering those key questions - "am I getting value for money out of my IT services?"

Is it hard to achieve?
Of course it depends.  But it needn't be hard.  Odds on, all the data already exists in your environment.  Correlating it and cormalising it can deliver huge value to the right Decision Makers - and can help release more money for those exciting innovations!

What's the first step?
Audit your data quality, and your supporting ITSM processes.  Forge links between key processes and individuals.  You can start small.  For training and advice - click

Tuesday, 9 March 2010

IT Financial Management - Depreciation

Hardware and Software capital purchases are often accounted through depreciation (or amortization, as it is known in the context of software).  Depreciation mechanisms can be complex, or more straightforward - ranging from the simple "straight line" method to the more complex accelerated mechanisms like "sum of years" or "double depreciation method".  

Let's analyse the effectiveness of these 3 mechanisms in the context of IT Financial Management:

Straight Line Method
The most simple method, accounts for a monthly asset value reduction by a linear method whilst also factoring in any salvage value.  Can be easily applied and calculated according to the following formula:
Monthly Depreciation = (Capital Purchase Value - Salvage Value) / Depreciation Period

Sum of Years/Months Method
The first accelerated method, introduced to recognise the fact that greatest depreciation happens early in the depreciation period.  A common example of this would be buying a new car.  For IT Financial Management, accounting for costs on a monthly basis, this becomes the "sum of months" method and is calculated:
Montly Depreciation = (Capital Purchase Value - Salvage Value) * (Depreciation Period in Months - Current Month) / Sum ( Depreciation Period in Months)

For example, a server costing $10,000, no salvageable value and being depreciated over 36 months would have monthly depreciation according to this formula:
Montly Depreciation = $10000 * (36 - Current Month) / (36+35+34+33+...+1)

Double Depreciation Method
The second accelerated method, again a more complex method to recognise the fact that greatest depreciation happens early in the depreciation period. This gives greater depreciation in a first period of depreciation, then slows in a second period.  This is calculated according to the following:
Montly Depreciation = ( Current Value - Salvage Value ) / ( 2 * Depreciation Period in Months)
unless this value is less than ( Capital Purchase Value - Salvage Value ) / Depreciation Period in Months, in which case this value applies

The complexities of the accelerated methods mean that, unless you have a large number of assets, and close financial control is really important to you, then the straight line method will be most appropriate.  In practise, this is closely what we see.

The more complex accelerated methods may be appropriate if you might consider selling your assets before their depreciation periods, or if you consider the improved accuracy to be important.  

For benefit in implementing these depreciation models for IT Financial Management - visit our main webpage at