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Service Financial Management (SFM)

In order to achieve process maturity and the intended business benefits of having a service catalog, you must incorporate standard and sound financial management practices in your service delivery process. CFOs and CEOs have long complained that internal service operations like IT, HR, and facilities are “black box” cost centers; eating up more and more budget without sufficient alignment with business goals. This situation is prevalent and is frequently the cause for short CIO tenures. For organizations where services have been provided “for free” or where costs are invisible and not directly charged to business units that consume them, there’s natural political resistance to change.

Imagine going to or Ebay and none of the products had a price? What if you couldn’t compare items? Ridiculous, right? Yet this is how most internal service providers operate today. They provide services and products with no known pricing, no chargeback mechanism, and typically rudimentary accounting and finance methods. Clearly, if your organization falls into this category, it needs to come up to par and operate as if it were a standalone enterprise. If you don’t do this soon enough, you become a prime target for outsourcing. Within ITILv3, this process is called IT Service Financial Management (SFM). SFM need not be full managerial and cost accounting according to Generally Accepted Accounting Principles (GAAP), but it must, at least, begin to solve the “everything is free” chaos that most organizations still operate.

The first and easiest step to achieve baseline SFM is to publish your Service Catalog with visible costs.

So, step 1 in rectifying the above situation is to incorporate price into every service and product offered. Sounds simple, right? Well, of course not. Internal services are not a free marketplace full of competitors and alternatives. You serve a generally captive audience; the employees and customers of your organization. Determining price under these circumstances is not so easy but need not be difficult.

There are two general approaches to pricing services:

  • Cost Plus, meaning, using best efforts and available information, assemble all of the cost inputs of a product or service, then add a margin (or fudge factor) to determine price

  • Estimation, meaning using a reasonable guess based on similar services and products provided in the public or based on available information.

Either method is OK, but of course, accuracy has tremendous value at some point. This said, using any method to put price in front of your customers will be a step toward aligning your organization with the Law of Supply and Demand and therefore your necessary first step toward Service Financial Management.

An Actionable Service Catalog like PMG SCS is the place where the prices of your services can be published, configured, and understood by your clients. Just like we as consumers shop online and make purchase (or not to purchase) decisions, price is a clear determining factor.

Following this simple step, you can mature to the next phases of SFM maturity, including doing full managerial and cost accounting, budget versus actuals, and full departmental chargeback and invoicing.

For more information contact us today.