Do the consumers of IT expect it for free? Unfortunately, many people believe that access to IT and to technology are free. For example, recently a friend visited me from the UK. He told me how when his family was traveling he gave his iPhone to his teenage daughter for a brief period to help relieve her boredom, only to find out that upon his return he was now was the proud owner of a 500 pound sterling roaming charge - all for the benefit of some time checking email, surfing the web, Facebook, iTunes and some new (well-needed, I am sure) ringtones [note to self to doublecheck that I have the unlimited international data roaming plan]!

I also spoke to the CIO of a large IT organization who told me that their organization has no appetite for chargeback, which I found ironic in that the theme of the workshop we were at was all about driving value!  She didn't realize that if technology is free then it can be difficult to recognize value or to demonstrate valid investment decisions. For example, with the recent heat wave on the East coast, if electricity was free I would have set the thermostat at 65 degrees instead of 70 contributing to an overpowered electricity grid) and if business class air travel was free I would be fighting with everyone else to be on the upper deck. The reality is that you have to charge, or at a minimum, communicate costs, even in IT, and the discipline to do so is the responsibility of IT Financial Management (ITFM).

ITFM allows IT to run like the rest of the business, addressing the financial aspects associated with IT services they deliver and allowing the business to understand if a service is profitable, valuable or simply required for legal reasons. This includes managing the supply side as the cost of a unit of service and the demand side elements including pricing or allocation-based cost recovery.

The total cost will include all direct costs such as hardware or software assets, indirect cost such as labor, utilities, space, outsourcing contracts and so on. ITFM must accurately identify, capture and control the cost from acquisition to retirement, which may also include depreciation of service components and assets over time.

Increasingly, IT organizations are evolving from the traditional role as cost centers to the role of service providers. As a result, companies need to create an environment in which the IT organization can be run like a business, using a service-based pricing structure in place of the traditional chargeback method of recovering costs.

There are essentially three types of ITFM models:

The subsidy model, which gives IT a fixed budget and allows no chargeback (but perhaps involves a high-level allocation back to the business units based on some "algorithm").

The cost center model, which bases charge-backs on actual costs. This is also called zero-based budgeting, because the IT organization's goal is to "break even" at the end of every budgeting cycle.

The pricing model, IT prices a service based on the cost of service, demand/consumption, SLA and plow back profit to improve efficiency, this model truly allows IT to run as a business.

Communicated effectively, ITFM offers tremendous benefits to enterprise customers, allowing organizations to set the price of a service while understanding the true costs and it can help institutionalize penalties and credits based on SLA performance.  In addition, organizations can also leverage ITFM for IT budgeting and fiscal planning activities.

The requirements for ITFM include the ability to perform consumption-based pricing and allocation; map cost centers from ERP and other systems to ITFM, and to define a bill of materials for a service as defined by various inputs and sources. ITFM should support multiple pricing and\or allocation models and tiered-based pricing so that IT can price their services effectively and is a powerful tool when used with the contribution of a service to the profit of the organization.   Imagine once you have this capability you can then use scenario modeling to perform powerful "What If" analysis enabling improved planning to make better IT decisions and reduce IT costs and more importantly provide excellent data to senior management for decision making.

As we continue down the path to more complex outsourcing arrangements and greater demand on IT for IT enabled business my recommendation is spend time in IT Financial Management now or reap the pain now and later.

There is no IT for free - someone is paying for it somewhere - even if you don't know who!