Why IT Financial Management in the GL is Difficult (If Not Impossible)
A common question we receive is, “Can I not simply do IT Financial Management in my general ledger (GL)?” Our belief is that although the GL is the source of truth since it contains high referential integrity (as it is most often subject to an annual audit), it is not best placed to deliver ITFM.
In order to get the reports, views, raw data and insights needed to manage IT spend effectively (and Run IT like a Business), you need the ability to view Technology spend in many different ways, or through different lenses.
One well-known example of this would be the four views of ITFM that Gartner refers to. These are about introducing the ability to slice or translate Tech spend by the below
- Asset view (often already in the GL)
People costs, hardware costs, software costs, outsourced providers
- Technology view
The same spend from the GL but translated into the cost of the IT kit or technical services the spend enables such as Servers, Storage or Network
- Business Services view
Precisely the same GL spend but now expressed in the context of the business unit that created the demand for that service (often a Revenue-generating business unit or profit center like Sales) and the service itself. Examples include: Applications (Business & Back-office), End User Services (Helpdesk, desktop/workstation/laptop)
- Investment view
How much spend is dedicated to Running the Business, Growing the Business or Transforming the Business or Capex vs Opex
Some other examples of alternate views of ITFM spend are
- Fixed vs variable, or direct vs indirect
- Keep the lights on vs change vs innovate
- IT spend expressed as a Product (Product teams, lines, categories)
- IT spend in the context of a customer journey (acquire, renew, service)
- IT spend in relation to a Business Capability (Digital Enablement)
Enabling the Gartner four views or other views in the GL is possible, but depending on the type of views and the number of views chosen, can come with heavy and essentially non practical customization of your GL.
An example to consider
Generating the Asset view from the GL is easy, as GLs should already have accounts which allow costs to be split by hardware vs software, and internal vs external labour (unless it all goes to “Computer Expenses” – if it does, don’t worry, we have solved for this one before, too).
Adding on the Technical view at a high level can be done in the GL, often through additional cost centres. Already in this example, though, the GL starts becoming rather large and cumbersome if you consider, for example, that to manage your servers effectively, you would need to know the cost of Wintel vs Unix vs Linux, and already then you need three cost centres just to manage your server spend.
Adding the Business Services view, which in itself is two views (a consuming Business unit slice and a business-facing service catalogue view), further complicates things, but it is vital for something like showback and chargeback.
Let’s look at it from the perspective of if I were to follow the above when capturing an invoice: I receive a large invoice from an outsourced vendor that provides a myriad of services. To give me the insight to manage the spend effectively as a whole and to maintain all four views, I would need to split each line of the invoice into multiple lines in the GL:
- Asset view - Hardware, software, staff and services.
- Technology view - Split each of the above further into which Technologies the vendor is enabling (Wintel Servers, SSD storage, Gold helpdesk support).
- Business Service view - Split by adding more lines or aggregate the above to express the spend in a view or dimension that the Business understands, providing internal service as well as their consumption.
- Investment view - Finally, add a tag (or further create more split lines) to the above, which further classifies the spend into Run, Grow or Transform.
Imagine loading this into your GL when booking every invoice (and training Accounts Payable to follow the process) and then having to create reports aggregating the different custom dimensions. It’s pretty obvious that performing this on one’s own is a large undertaking which would place high strain on the GL and require dedicated resources to maintain the complexity, as well as technical skill to develop reports to cope with the large amounts of data.
All this excludes measuring and trending Unit Rates of services, like cost per GB or cost per customer claim for benchmarking purposes as well!
Enter the need for an ITFM tool
ITFM tools bring many benefits, but in the context of enabling the views of IT spend, they are specifically designed to generate many views of Tech spend accurately, rapidly and at scale. An effective ITFM tool should allow for many views and for new views to be introduced if required, and for the underlying cost model and data to scale to match this demand and evolution.
ITFM tools are also designed for handling highly granular consumption data, such as server host names or desktop serial numbers. This consumption data allows consumers and service owners to have visibility and to influence consumption of a service. This highly granular information is useful in justifying and building trust in IT service consumption. Loading this data into the GL is hardly feasible, as it often originates from an asset management system and would exponentially increase the load on the GL.
With all the views and service data sitting in an ITFM tool, this tool now complements the GL and becomes a subledger of the GL, i.e. your ITFM tool houses all your views, transparency, consumption, service data, unit rates calculation, showback and chargeback data, and also reports on all of them!
Ultimately, the GL and an ITFM tool each have a distinct purpose, focus and strengths. Financial reporting is best originated from the GL, while multiple views on spend are best left to an ITFM solution.
Blake heads up Customer Success at MagicOrange and has experience in ITFM and Shared Services Finance. He has completed numerous ITFM implementations across many sectors including Financial Services, Retail, Manufacturing, Mining and Government