Purpose

The purpose of a service strategy is to devise and describe how a service provider enables an organization to achieve its business outcomes; it describes how to decide which services to offer and how these services should be managed. Strategy management for IT services ensures that there is such a strategy and defines, maintains, and periodically evaluates the strategy to ensure that it is achieving its purpose.

Objectives

The objectives of service strategy management are as follows:

• To consider the environments (both internal and external) in which the service provider operates. The aim is to identify opportunities that could be of benefit to the organization.
• To identify any constraints that would impact the ability of the business to achieve its desired outcomes or hamper the delivery or management of services and to identify how those constraints could be removed or their effects reduced.
• To agree on the perspective of the service provider and to ensure it remains relevant so that a clear statement of the vision and mission of the service provider can be defined.
• To understand the position of the service provider relative to its customers and other service providers, enabling the definition of the services to be delivered to each of the market spaces. The service provider will also understand how to maintain a competitive advantage over other providers.
• The final objectives cover the strategic plans. A library of critical documents should be produced, maintained, and distributed to relevant stakeholders. These should include the IT strategy document, the service management strategy document, and strategy plans for each service.

It is essential that these strategic plans are translated into tactical and operational guidance that is practical for the relevant department or group responsible for delivery. As with all key documents, processes should be in place to ensure that the documents are updated as circumstances change

Scope

Now let’s consider the scope of service strategy management. Strategy management for an organization is the responsibility of the executives who set the objectives of the organization and prioritize the necessary investments to enable these objectives to be met. Large organizations will have a dedicated strategy and planning manager who reports directly to the board of directors and is responsible for the assessments, the strategy documents, and the execution of the strategy.

It is important to realize that an organization’s strategy is not limited to a single document but is more likely to be broken down into a strategy for each unit of the business. You can see an example of how a business strategy might be broken down into strategies for IT and for manufacturing in Figure 3.1. The achievement of each of these enables the overall strategy to be met

Strategy management for IT services has to ensure that the services and the way they are managed support the overall enterprise strategy.

Strategy management can be a generic process that could be applied to the business as a whole or to any of the business units. However, ITIL is specifically concerned with how this process is applied to IT as a service provider. You should note that for an external service provider, the business strategy might be related to IT services delivered to an external customer and the IT strategy would be related to how those services will be delivered and supported. At the same time, external service providers do not just provide IT services to customers. They are also consumers of their own (and potentially other third-party) IT services. External service providers also have internal IT service requirements that must be met to enable them to survive.

The scope of strategy management in ITIL is shown in the diagram in Figure 3.2. You can see how a business strategy is used to develop a set of tactics (a set of detailed approaches, processes, and techniques to be used to achieve the strategic objectives) and operations (the specific procedures, technologies, and activities that will be executed by individuals and teams).

The IT strategy (and therefore also the strategy for IT services) (the top box in the column on the right) is derived from the requirements of the business strategy. The IT strategy can determine whether a strategic objective is technologically possible, and the level of investment required, so that the business has the information upon which to base a decision on whether the objective should be included and at what priority.

IT tactics are influenced by both IT strategy and the business tactics. If a business tactic requires compliance with a regulation, IT will have to ensure that the IT tactics make this possible, and the investment required to overcome this if they don’t.

IT operations are derived from the IT tactics but also by the requirements of business operations. The way in which the different operational environments are coordinated and how they interact is very important to strategy management for IT services.

The dotted line in Figure 3.2 between IT strategy and business tactics shows the relationship between these two areas. IT must not define a strategy that clashes with the business tactics, and the business tactics regarding the use of IT must be compatible with the IT strategy. Similarly, IT tactics need to be valid for business operation.

Strategy management for IT services is intended for managing the strategy of a service provider. It will include a specification of the type of services it will deliver, the customers of those services, and the overall business outcomes to be achieved when the service provider executes the strategy. The IT service strategy is a subset of the IT strategy that, in addition to the IT service strategy, includes strategies for IT architecture, portfolio management (other than services), application management, infrastructure management, project management, technological direction, and so on.

Remember, a service strategy is not the same as an ITSM strategy, which is really a tactical plan.

• A service strategy is the strategy followed by the service provider to define and execute services that meet a customer’s business objectives. For an IT service provider, the service strategy is a subset of the IT strategy.
• A service management (ITSM) strategy is the plan for identifying, implementing, and executing the processes used to manage services identified in a service strategy. For an IT service provider, the ITSM strategy will be a subset of the service strategy.

Value

A well-defined and managed strategy delivers value by ensuring that all stakeholders agree on the objectives and the means to achieve them; resources and capabilities are aligned to achieving business outcomes, and investments match the intended development and growth. As a result, service providers provide the best balance of services, each with a clear business purpose.

Strategy management for IT services encourages appropriate levels of investment, resulting in the following outcomes:

• Cost savings; investments and expenditure are matched to achievement of validated business objectives rather than unsubstantiated demands.
• Increased levels of investment for key projects or service improvements.
• Shifting investment priorities.

Without a strategy, there is a real danger that whoever shouts loudest gets to decide what happens and services (and expenditure) are matched to unproven demand.

Sometimes, what the customer is asking for requires a departure from the service provider’s strategy. An external service provider needs to decide whether to change its strategy or to turn down the business. An internal provider does not usually have the second option, and in these cases, strategy management for IT services will enable the internal provider to work with the business units to make them aware of the impact of their demand on the current strategy. In some cases, customer demands do not change the overall strategy but may involve a change in priorities.

Policies, Principles, and Basic Concepts

The previous chapter defined and explained service strategy in detail. This chapter includes a generic model for defining, executing, and measuring service strategy, which can be applied at the most senior level or as the strategy for just a part of the organization.

The role of the service strategy will differ between different types of service provider; for external service providers, whose core business is providing services, the service strategy will be the central component of the organization’s overall strategy.

In contrast, for internal service providers, the service strategy supports the overall enterprise strategy. It forms one of a number of tactical plans for the achievement of the organization’s overall strategy. The organization’s overall strategy may be at risk of failing if the IT strategy fails to support it. The issue causing the IT strategy failure must be addressed or the strategy must be altered to what is achievable.

The first use of the process must be correctly scoped, and it is particularly important that senior executives are seen to be behind the initiative. Over time, incremental improvements can be made.

Process Activities, Methods, and Techniques

In Figure 3.3, you can see the high-level strategy management process, which we are going to examine in depth. The process is divided into three areas:

• Strategic assessment
• Strategy generation
• Strategy execution

Each area covers a number of steps.

Triggers, Inputs, Outputs, and Interfaces

Next, we consider the triggers for the process, the inputs used, and the outputs that result from it. We will also examine how this process interfaces with others.

Critical Success Factors and Key Performance Indicators

We now cover CSFs and KPIs and look at some examples for strategy management.

• Critical success factors (CSFs) are the conditions that need to be in place, or things that need to happen, if the process is to be considered successful. Each CSF will include examples of key performance indicators (KPIs).
• KPIs are metrics that are used to evaluate factors that are crucial to the success of the process. KPIs should be related to CSFs.
• CSFs should be based on the organization’s objectives for the process, and the KPIs should be appropriate for its level of maturity, its CSFs, and its particular circumstances.
• Achievement against KPIs should be monitored and used to identify opportunities for improvement, which should be logged in the CSI register for evaluation and possible implementation.

We will cover some examples; the full list is available in the ITIL Service Strategy publication. Here are some sample CSFs for strategy management for IT services and some associated KPIs:

• CSF: “The ability to identify constraints on the ability of the service provider to meet business outcomes and to deliver and manage services, and the ability to eliminate these constraints or reduce their impact.”
  • KPI: Number of corrective actions taken to remove constraints, and the result of those actions on the achievement of strategic objectives.
• CSF: “The service provider has a clear understanding of their perspective, and it is reviewed regularly to ensure ongoing relevance.”
  • KPI: Vision and mission statements have been defined, and all staff members have been trained on what they mean in terms of their roles and jobs within the organization.
  • KPI: Each business unit has a strategic plan that clearly shows how the business unit’s activities are linked to the objectives, vision, and mission of the organization.

Challenges

The following challenges exist for strategy management for IT services:

• Conducted at the wrong level; should be driven by senior executives
• Lack of accurate information about the external environment
• Lack of support by stakeholders
• Lack of the appropriate tools or a lack of understanding of how to use the tools and techniques identified in this chapter
• Lack of the appropriate document control mechanisms and procedures
• Operational targets that are not matched to the strategic objectives, leading to operational managers striving to achieve targets that are not in support of the strategy

Risks

The risks to strategy management for IT services are as follows:

• A flawed governance model allows managers to decide which aspects of a strategy to implement or to deviate from the strategy for shorter-term goals.
• Short-term priorities override the directives of the strategy.
• Strategic decisions are made based on information that has not been validated and is incomplete, incorrect, or misleading.
• The wrong strategy is chosen; it is important that incorrect decisions are detected early and corrected.
• Deciding upon strategies is seen as an exercise that happens once a year and that has no bearing on what happens for the rest of the year.
• The metrics of each organizational unit must be aligned to those of the strategies.
• Managers and staff alike must be educated about the contents and objectives of the strategies at the appropriate level of detail.

Once a strategy has been finalized, it needs to be communicated. Typically this communication would include the following:

• Distributing a copy of the plan to every executive and key stakeholder. A summary, excluding any confidential areas that might be necessary, should be distributed rather than the full plan.
• Providing board members or IT steering group members with “talking points” guidance on the key points to be communicated, what points to emphasize, and how to ensure compliance in their area of the organization.
• Publicizing key aspects of the strategy, such as vision, mission, and main objectives, through posters, screen savers, and so on.
• The strategy including the goals and KPIs should be included in policies, procedures, and employee manuals where relevant.
• Providing key strategic partners, such as vendors and investors, with a summary of plans and briefing them about how they are expected to use them.

Purpose

The purpose of this process is to ensure that the appropriate mix of services is delivered by the service provider to meet the requirements of the customer. The process enables us to track a number of important items of information about our services, including the investment that has been made and the interaction with other services.

The information captured in the service portfolio links the services being provided to the business outcomes they support. This ensures that activities across the whole of the lifecycle are aligned to ensure value is delivered to customers.

Objectives

The objectives of service portfolio management are as follows:

• Provide a process that allows an organization to manage its overall service provision. Through this process, the service provider develops mechanisms to investigate and decide which services to provide to its customers. This decision is based on the analysis of the potential return that could be generated and acceptable levels of risk.
• Maintain the definitive managed portfolio of services provided by the service provider. Each service should be identified, along with the business need and outcome it supports.
• Provide an information source that allows the organization to understand and evaluate how the IT services provided enable the organization to achieve its desired outcomes. It will also be a mechanism for tracking how IT can respond to organizational changes in the internal or external environments.
• Provide control over which services are offered, to whom, with what level of investment, and under what conditions.
• Track the organizational spend on IT services throughout their lifecycle, allowing for regular reviews of the strategy to ensure that the appropriate investment is being made for the chosen strategic approach.
• Provide information to enable decision-making regarding the viability of services and when they should be retired.

Scope

Service portfolio management has a very broad scope because it covers all the services a service provider delivers as well as those it is planning to deliver and those that have been retired from live operation.

Because the primary concern of the service portfolio management process is to understand if the services being provided are delivering value, the process should cover the ability to track investment and expenditure on services. This can then be compared to the desired business outcomes.

Internal and external service providers may have a different approach to the way they connect services to business outcomes. For an internal service provider, it will be necessary to work closely with the business units in the organization to compare the outcomes with the investment. External service providers are more likely to have this information captured as part of the agreement or contract that defines the relationship with the business. The services they provide are also more likely to be directly associated to revenue generation or support revenue generation services.

Service portfolio management should be responsible for evaluating the value of the services provided throughout the whole of their lifecycle. It is also important to be able to compare the merits of the existing services against those that are being planned or the benefits they provide in replacing retired services. In this way, we can be certain that the services provided meet the required business needs.

The Service Portfolio

We are now going to review the service portfolio itself, which is the output from the process. Figure 3.4 illustrates the components of the service portfolio. You should remember these from your foundation course; they are the service pipeline, service catalog, and retired services.

The service portfolio is the complete set of services managed by a service provider. This includes the contractual and financial commitments across internal, external, or third-party providers, new service development activity, and improvement initiatives. All services should be included, whether they are visible, customer-facing services such as the core or the enhancing services or the enabling services that support them.

The service portfolio also covers the services that are currently only in a conceptual stage, potentially the services that would be developed if there were no limit on budget, resources, or capabilities. The service portfolio shows the allocation of all the resources in use across the whole service lifecycle. Each stage of the lifecycle will be making demands on the available resources and capabilities, and the service portfolio allows us to see those allocations and resolve any potential conflicts according to the importance of the business outcomes.

Any new project or development should have an approved financial plan and allocated budget demonstrating the cost recovery or return on investment, and this will be captured in the service portfolio. By ensuring that we have the right mix of services across the pipeline and catalog, we can make sure we have the correct funding for all of the IT service provider activities across the service lifecycle.

As you will see later, the service catalog is the only part of the service portfolio that is customer facing, although the information it contains may be used as part of customer-facing reports, presentations, and business cases. The live operational services, as captured in the service catalog, are the only services that will recover costs or earn profits.

Value

Service portfolio management helps the business to decide where to invest. Services are implemented not just because they are a good idea or because they are an industry standard, but because there is a good business case. The expected outcomes are compared with the investment required to build and deliver a service. This means that customers understand what will be delivered and under what conditions; they can then decide whether the service is a good or bad investment

The service provider, through the decisions made as part of service portfolio management, can help its customers achieve their business strategies.

Policies, Principles, and Basic Concepts

The service portfolio represents the commitments and investments made by a service provider across all customers and market spaces. It shows any contractual commitments and which new services are being developed. It will also include current service improvement plans initiated by CSI. Some services are not provided directly by the service provider, but bought in from suppliers. The service provider remains responsible for these third-party services, as they form an integral part of the customer service offering. An example of such a service would be the wide area networking service. It is important to note, therefore, that the portfolio includes the complete set of services that are managed by a service provider.

Service portfolio management ensures that the service provider understands all the services it provides, the investment that has been made in these services, and the objectives and required returns for each one. This knowledge is necessary before tactical plans for management of the services are made. The process plays a role in strategy generation, ensuring that the agreed strategy is appropriately executed at each stage. This prevents common mistakes such as choosing a new tool before optimizing processes. It also ensures what is actually done matches what was intended. The service portfolio management approach also helps managers to allocate resources in line with priorities.

The service portfolio also identifies the services that the organization would provide if it had unlimited resources, capabilities, and funding. This helps to identify what can and cannot be done. Every decision to provide a service uses resources that could have been spent on providing a different service, so the choice of what to prioritize and the implications of that choice in terms of the allocation of resources and capabilities are understood. It also ensures that the approval to develop potential services in the pipeline into catalog services is granted only with approved funding and a financial plan for recovering costs (internal) or showing profit (external).

Service Catalog

The catalog is a database of information regarding the services available to customers—these may be already live, or those that are available for deployment. This part of the service portfolio is published to customers, and it includes information about deliverables, prices, contact points, and ordering and request processes. It is essential that due diligence is undertaken before a service is added to the catalog, so that the service provider understands how to deliver it successfully, and at the expected cost. The service catalog also contains details about standard service requests, enabling users to request those services using the appropriate channels. These requests may be channeled through a web portal and then routed to the appropriate request fulfilment procedure.

The service catalog also informs service portfolio management decisions, as it identifies the linkage between service assets, services, and business outcomes and any potential gaps in the service portfolio.

Take a look at Figure 3.5, which shows linkages between service assets, the services they support, and the business outcomes they facilitate:

• The boxes on the left are service assets used by the service provider to provide services. These could be assets such as servers, databases, applications, and network devices.
• The box in the middle shows the services in the service catalog. There are two layers of services shown. The layer on the left shows supporting services, which are usually not seen by the customer directly, such as application hosting (contained in a view of the service catalog called the technical or supporting service catalog). The second layer of services includes customer-facing services.
• The boxes on the right are business outcomes, which the business achieves when it uses these services.

Services that are performing well and are popular are identified. They may be allocated additional resources to ensure that they continue to perform as required, and will be able to satisfy increased demand.

Services that are performing in an acceptable manner but could be improved in terms of efficiencies or functionality are deemed viable services. Introducing new attributes, addressing warranty or utility issues, improving how well they match demand, or setting new pricing policies are all approaches that may be used to make the services more popular.

Services that are unpopular or which consistently perform badly are marked for retirement.

A subset of the service catalog may be third-party or outsourced services. These extend the range of the service catalog in terms of customers and market spaces. Figure 3.6 shows how these third-party services may be used as a stopgap to address underserved or unserved demand until items in the service pipeline are phased into operation. They may also be used to replace services being retired from the service catalog.

A comparison of the typical content and purpose of the service portfolio and service catalog is illustrated in Figure 3.7.

Service Portfolio Management through the Service Lifecycle

Here we’ll look briefly at the role played by service portfolio management across the rest of the service lifecycle. Although service portfolio management is a process within service strategy, it also plays an important part in every stage in the service lifecycle. We start by looking at its role in service design.

• In the service design lifecycle stage, service portfolio management ensures that design work is prioritized according to business needs and clarifies how the service will be measured by the business. It ensures that each service is clearly linked to the agreed business outcomes and that the service assets used and performance levels required of the service are documented. Together with demand management information, this gives a clear picture of when service will be required and the expected levels of demand. Service portfolio management helps the design team to focus on objectives, outcomes, and priorities. It also works with the PMO or project manager, ensuring that the services are built on time, to specification, and to budget.
• Service transition builds and tests the services that will be placed into the service catalog. Service portfolio management provides guidance to service transition on building, testing, and evaluating the service. Change management is used to authorize the move of a service into the service catalog. This authorization ensures that the final product is ready and can be supported, that it is technically feasible and financially viable, and that there is sufficient operational capability in place. Before adding items to the catalog, the impact on commitments made to customers needs to be assessed and sufficient resources and capabilities set aside to provide the service. If resources cannot be made available, the service may be prevented from going live.
• Service operation delivers the service in the service catalog part of the service portfolio. Service portfolio management provides operations with an understanding of the services and how and why they need to be delivered. This is an important input to defining standard operating procedures, event management, incident management priorities, and escalation procedures.
• Continual service improvement evaluates whether the services in the portfolio met the stated objectives, and if not, it identifies ways in which the situation can be rectified. Continual service improvement also evaluates the business cases and objectives to ensure that they are still valid and therefore that service portfolio management continues to prioritize services appropriately.

Process Activities, Methods, and Techniques

Service portfolio management consists of four main phases of activity. We are going to examine these one by one. The four stages are Define, Analyze, Approve, and Charter:

• The first stage is the Define stage. This phase focuses on documenting and understanding existing services and new services. Each service must have a documented business case. Data for each service, such as which service assets are required and where investments are made, needs to be validated.
• The second stage is the Analyze stage. The analysis of services in the portfolio will indicate whether the service is able to optimize value and how supply and demand can be prioritized and balanced.
• The third stage is the Approve stage. Every service needs to be approved, and the level of investment needs to be authorized to ensure sufficient resources to deliver the anticipated levels of service.
• The final stage is the Charter stage. A charter is a document authorizing the project and stating its scope, terms, and references. Services are not just built on request from anyone in the organization. They have to be formally chartered, and stakeholders need to be kept up-to-date with information about decisions, resource allocation, and actual investments made.

Before we look at the process in detail, it is important to remember how we define the service portfolio itself. We begin by collecting information from all existing services as well as every proposed service. However, the portfolio is not static, and so the data must be refreshed and validated on a recurring basis. How often this happens will depend on the portfolio itself: does it include stable, legacy systems with few changes or a fast-changing area? A reevaluation of the portfolio may be triggered by external events; for example, a merger with or acquisition of another company would require a thorough reevaluation to spot possible duplications.

New and changed service proposals can be initiated from a number of sources as a result of, for example, changes to plans or the identification of a service improvement plan. They need to be formally assessed and approved. Service portfolio management maintains a central record of all plans, requests, and submissions that are submitted. In some organizations, they are simply called requests, but they are not the same as standard service requests submitted for request fulfilment, which could lead to confusion. Inputs to service portfolio management may come from the following processes:

• Strategy management is the primary input to service portfolio management. It presents strategic plans outlining initiatives for business opportunities and outcomes along with the services these require. The plans are evaluated by service portfolio management for technical and financial feasibility and ROI.
• Business relationship management receives requests from customers. These may be dealt with through change management, request fulfilment, or incident management, but some will need to be submitted to service portfolio management. They include requests for new services or added functionality or performance improvements to existing services.
• CSI initiates three types of input to service portfolio management. They may include possible improvements to service levels of existing services. Each will be assessed in terms of the investment and the projected return. CSI may also identify new opportunities or gaps in the current portfolio of services or opportunities for improvements in cost, mitigation of risks, and so on, affecting one or several existing services or even the entire operation of the service provider. Note that any opportunities identified by CSI that would require a change in the organization’s strategy are submitted to strategy management.
• Some service management processes involve managing changes to services or modeling warranty and utility options that can be presented to the customer. Many of these would have an impact on investment, so service portfolio management should evaluate these suggested changes before they are initiated.

Triggers

Triggers for service portfolio management are as follows:

• A new or changed strategy. A change to a perspective, position, or pattern of action might impact existing services or service models.
• Business relationship management receives a request for a new or changed service; service portfolio management would help define and formalize this request before submitting it to change management as a change proposal.
• Service improvement opportunities from CSI could involve service portfolio management. Any reported deviation from the specifications, cost, or release time from design, build, and transition teams during the charter stage of the process would involve service portfolio management in estimating the impact and defining corrective action.
• Service level management reviews identify a service failing to deliver its expected outcomes or being used in a different way from how it was intended; service portfolio management would be involved in defining corrective actions.
• Financial management reports that the costs for a service vary significantly from the expectation, thus impacting the potential return on investment for that service; again, service portfolio management would be involved in defining corrective actions.

Inputs

Service portfolio management has the following inputs:

• Strategy plans
• Service improvement opportunities
• Financial reports
• Requests, suggestions, or complaints from the business
• Project updates for services in the charter stage of the process

Outputs

The following list includes the outputs of service portfolio management:

• An up-to-date service portfolio
• Service charters authorizing the work for designing and building new services or changes to existing services
• Reports on the status of new or changed services
• Reports on the investment made in services in the service portfolio and the returns on that investment
• Change proposals to allow change management to assess and schedule the work and resources required to charter services
• Strategic risks that could be added to a central risk register

Interfaces

Interfaces include those with the following processes:

• Service catalog management. Service portfolio management determines which services will be placed into the service catalog, while service catalog management ensures that this is done.
• Strategy management for IT services defines the overall strategy of services; this determines what type of services should be included in the portfolio. It determines the objectives for investments in terms of anticipated returns and the ideal market spaces that will be targeted.
• Financial management for IT services provides information and tools to enable service portfolio management to perform return on investment calculations; it also helps to track the actual costs of services. This is used to improve the analysis of services and forecasts in the future.
• Demand management provides information about the patterns of business activity that is used to determine the utilization and expected return on investment for the service.
• Business relationship management initiates requests and obtains business information and requirements used in defining services and evaluating whether they would provide a sufficient return on investment. It keeps customers informed about the status of services in service portfolio management.
• Service level management ensures that services are able to achieve the levels of performance defined in service portfolio management and provides feedback when this is not the case.
• Capacity management and availability management ensure that the capacity and availability requirements of chartered services are designed and built.
• IT service continuity management identifies the business impact of risks associated with delivering the service and designs countermeasures and recovery plans to ensure that the service can achieve the objectives defined during service portfolio management.
• Information security management ensures that the confidentiality, integrity, and availability objectives defined during service portfolio management are met.
• The supplier management process identifies situations in which a supplier cannot continue to supply services or a supplier relationship is at risk.
• Change management evaluates the resources required to introduce new services or changes to existing services, thus enabling the service to be chartered. It ensures that all changes involved in designing, building, and releasing the service are controlled and coordinated.
• Service validation and testing ensures that the anticipated functionality and returns of each service can be achieved.
• Knowledge management enables IT managers and architects to make informed decisions about the best service options to meet the organization’s objectives.
• Continual service improvement provides feedback about the actual use and return of services against their anticipated use and return. This information is used to improve services and make changes to the mix and availability of services in the service portfolio.

Critical Success Factors and Key Performance Indicators

Finally, we cover the CSFs and KPIs for this process. (Remember the explanation of these in the strategy management section.) We will cover some examples, but for the full list, see the ITIL Service Strategy publication:

• Critical success factor: “The existence of a formal process to investigate and decide which services to provide.”
  • KPI: A formal service portfolio management process exists under the ownership of the service portfolio management process owner.
  • KPI: The service portfolio management process is audited and reviewed annually and meets its objectives.
• Critical success factor: “The ability to document each service provided, together with the business need it meets and the business outcome it supports.”
  • KPI: A service portfolio exists and is used as the basis for deciding which services to offer. An audit shows that every service is documented in the service portfolio.
  • KPI: There is a documented process for defining the business need and business outcome, which is formally owned by the service portfolio management process owner.
  • KPI: Each service in the service portfolio is linked to at least one business outcome. This is verified through a regular review of the service portfolio.

Challenges

Service portfolio management is presented with the following challenges:

• The lack of access to customer business information required to enable service portfolio management to understand the desired business outcomes and strategies
• The absence of a formal project management approach, which makes chartering and tracking services through the design and transition stages more difficult
• The absence of a project portfolio, which makes assessing the impact of new initiatives on new services or proposed changes to services difficult
• Difficulty in identifying objectives, use, and return on investment of services due to the lack of a customer portfolio and customer agreement portfolio
• A service portfolio focusing purely on the service provider aspects of services, which makes it difficult to calculate the value of services, to model future utilization, or to validate the customer requirements for the service
• The lack of a formal change management process to control the introduction of new services and manage changes to existing services

Risks

There are a number of risks to service portfolio management:

• Responding to customer pressure and offering services without validated or complete information and without a full investigation into the risks involved. Service portfolio management is concerned with reducing risks by having a complete understanding of the service being offered; a hurried response negates the whole process.
• Offering services without defining how they will be measured. Without agreeing to this, we cannot calculate the return on investment. A service may be delivering value, but this cannot be proved, making the service vulnerable to being discontinued due to cost cutting.

Purpose of Financial Management

In order to design, develop, and deliver the services that meet the organizational requirements, we must secure an appropriate level of funding. This is the main purpose of financial management for IT services. At the same time, the financial management process should act as a gatekeeper for the expenditure on IT services and ensure that the service provider is not overextended financially for the services it is required to deliver. This will require a balance between the cost and quality of the service.

Cost and quality are key factors in the provision of services, and the only way we can allocate and understand the cost of service provision is through sound financial practices.

Objectives of Financial Management

The objectives of the financial management process are as follows:

• Defining and maintaining a financial framework that allows the service provider to identify, manage, and communicate the actual cost of service delivery.
• Understanding and evaluating the financial impact and implications of any new or changed organizational strategies on the service provider.
• Securing the funding that is required for the provision of the agreed services. This will require significant input from the business and will naturally be dependent on the overall approach to financial management and cross-charging within the organization.
• Facilitating good stewardship of service and customer assets to ensure that the organization meets its objectives. This should be done by working with service asset and configuration management and knowledge management.
• Performing basic financial accounting in respect to the relationship between expenses and income, and ensuring that these are balanced according to the overall organizational financial policies.
• Reporting on and managing expenditure for service provision on behalf of the stakeholders.
• Managing and executing the organization’s policies and practices relating to financial controls.
• Ensuring that financial controls and accounting practices are applied to the creation, delivery, and support of services.
• Understanding the future financial requirements of the organization, and providing financial forecasts for service commitments and any required compliance for legislative and regulatory controls.
• If appropriate, defining a framework that allows for the recovery of the costs of service provision from the customer.

Scope of Financial Management

Financial management is normally a well-recognized activity in any organization, but the specific requirement to manage funding related to the provision of IT services may not be so well established.

It is important to understand the strategic approach that is adopted in relation to IT service provision. How will it be managed? Is it internally or externally sourced? If it’s internally sourced, is there a requirement to cross-charge for services, or is there some other mechanism of cost recovery in place?

In the majority of organizations, there will be qualified accountants in charge of the corporate finances, usually as part of the finance department. They will set the policies, standards, and accounting practices for the business. The strategy relating to IT funding will be part of the overall accounting approach, but the specifics may be managed locally as part of the IT department.

Those engaged in financial management for IT services must ensure that the practices are consistent with the corporate controls and that reporting and accounting activities meet with the governance standards as defined for the whole organization. This will also assist with general understanding by the various business units of how IT is funded. Communication and reporting of internal funding practices across an organization is extremely important for enabling a true understanding of the costs of IT services.

Using a service management approach to delivering services should mean that the accounting for IT services is more effective, detailed, and efficient. For an internal service provider, this will enable a translation of the information between service provider and business.

Financial management consists of three main processes, budgeting, accounting, and charging.

Budgeting This is the process of predicting and controlling the income and expenditure of money within an organization. Budgeting consists of a periodic cycle (usually annually) of negotiation to set budgets and the monthly monitoring of the same.

Accounting This is the process that enables the IT organization to account fully for the way its money has been spent. It should enable a cost breakdown by customer, service, activity, or other factor to demonstrate the allocation of funds. It will normally require some form of accounting system (ledgers, charts of accounts, journal, etc.) and should be managed and overseen by someone with an accountancy qualification or skills.

Charging This is the process required to bill customers for use of the services, and it will only be applicable where the organizational accounting model requires it to take place. It requires sound accounting practices and supporting systems so that any cross-charging is accurate and traceable.

The cycles associated with financial management are shown in Table 3.1. There are two cycles:

• A planning cycle (annual), where cost projections and workload forecasting form a basis for cost calculations and price setting
• An operational cycle (monthly or quarterly), where costs are monitored and checked against budgets, bills are issued, and revenue is collected

Value

Many internal IT organizations now realize that they share several characteristics with external service providers. Both internal and external providers need to analyze, package, market, and then deliver services. Both need to understand and control supply and demand and ensure that their services are delivered as cost-effectively as possible.

Sound financial management for IT services provides the information the service provider needs to achieve:

• Enhanced decision-making
• Speed of change
• Service portfolio management
• Financial compliance and control
• Operational control
• Value capture and creation

Financial management provides the information needed to generate strategies or to devise new ways of using assets to achieve goals. It enables the business to understand the financial results of current strategies, as in the following examples:

• Has cutting our prices resulted in more business?
• Is that business profitable?
• Which services cost us the most, and why?
• How efficient are we compared to alternatives?
• Where could we improve?
• Which areas should we prioritize for CSI?

Good financial management results in a number of specific benefits to the business. It enables the business to comply with regulatory and legislative requirements and generally accepted accounting principles. This ensures that the business is operating legally and is not at risk of being fined for noncompliance. By understanding costs, a realistic budget can be prepared so that the money available is sufficient to cover the cost of service. Finally, the business has the information it needs to make sound business decisions regarding the use of and investment in IT.

Sound financial management also ensures that when it comes to charging for IT services, internal service providers can recover the full cost of service from the business if required. The business units will also have the information regarding the charges they need for preparing their own budgets. External providers can ensure that they charge customers a sufficient amount to cover costs and make a profit. Most fundamentally, by linking IT services to business outcomes, it ensures that all IT spending has a business justification.

Policies, Principles, and Basic Concepts

Financial management for IT services applies the financial management policies of the organization. It must therefore follow the policies and practices of the organization as a whole. It is a policy decision by the organization’s executives whether IT is a profit center or a cost center. A cost center is a business unit or department to which costs are assigned, but it does not charge for services provided. It must account for expenditure. A profit center is a business unit that charges for providing services. A profit center can be created with the objective of making a profit, recovering costs, or running at a loss.

Process Activities, Methods, and Techniques

In Figure 3.8, you can see the financial management process. We are going to examine the high-level process steps of accounting, budgeting, and charging.

Triggers

The following triggers are associated with financial management for IT services:

• The organization will have its own monthly, quarterly, and annual financial reporting cycles for activities such as budgeting. Preparing these mandatory reports on IT expenditure would trigger the process.
• Audits may suggest or mandate improvement actions which would need to be implemented.
• Other service management processes may request financial information regarding return on investment data, for example.
• An investigation into a new service opportunity would trigger a financial assessment.
• The introduction of charging for IT services for an internal service provider or the need to determine the price of a service for an external service provider would trigger the accounting and charging processes.
• Finally, a request for change will trigger the need for financial information about the cost of making changes and the ongoing financial impact of the change.

Inputs

We looked at the financial management activities shown on Figure 3.8. This diagram also shows the inputs and outputs of the process. The typical inputs shown on the diagram include the following:

• The policies, standards, and practices that are laid down by legislation or regulators and those imposed by the organization’s financial managers.
• The generally accepted accounting principles (GAAP) and local variations is another input.
• All data sources in which financial information is stored, including the supplier database, configuration management system, the service portfolio, customer agreement portfolio, application portfolio, and project portfolio, may input into financial management.
• Finally, the service portfolio provides the structure of services that will be provided. These services will be the basis for the accounting system because all costs (and returns) will ultimately be expressed in terms of the services provided.

Outputs

Next we look at the outputs of financial management. These were also shown on Figure 3.8, in addition to the inputs and activities discussed previously. The outputs are as follows:

• Service valuation. This is the ability to understand the costs of a service relative to its business value.
• Service investment analysis. Financial management provides the information and history to enable the service provider to determine the value of the investment in a service.
• Compliance. Regardless of the location of a service provider, or whether it is internal or external, financial data is subject to regulation and legislation. Financial management for IT services helps implement and enforce policies that ensure that the organization is able to store and archive financial data, secure and control it, and make sure it is reported to the appropriate people.
• Cost optimization. The goal of cost optimization is to make sure investments are appropriate for the level of service that the customers demand and the level of returns that are being projected. Business impact analysis (BIA) involves understanding the effect on the business if a service were not available. This enables the business to prioritize investments in services and service continuity.
• Planning confidence. This is not a tangible output; it refers to the level of confidence that service stakeholders have in the service provider being able to accurately forecast costs and returns.

Interfaces

All service management processes use financial management to determine the costs and benefits of the process itself. Some also use it to support the execution of their process activities. The following list includes the major interfaces with financial management for IT services:

• Strategy management works with enterprise financial management to determine the financial objectives for the organization. It defines expected returns on investment based on information provided by financial management. Financial management will track and report on the achievement of ROI.
• Service portfolio management provides the service structure that will be used to define cost models, accounting and budgeting systems, and the basis for charging.
• Business relationship management provides information to financial management regarding how the business measures the value of services and what they are prepared to pay for services.
• Capacity and availability management are able to provide valuable information to financial management for IT services about the various options of technology and service performance. This in turn will be used to calculate costs.
• Change management uses financial management for IT services to help determine the financial impact or requirements of changes.
• Service asset and configuration management documents financial data about assets and configuration items. This data is used as the basis for financial analysis and reporting. Enterprise financial management also provides the policies that are used as the basis for managing financial assets of the organization (such as depreciation).
• Continual service improvement uses financial management for IT services to determine whether the return of a proposed improvement is worth the investment required to make the improvement.

Critical Success Factors and Key Performance Indicators

Finally, we cover the CSFs and KPIs for this process. (Remember the explanation of these in the section on strategy management for IT services.) We will provide some examples, but as with the other processes, the full list is available in the ITIL Service Strategy publication. Here are examples of CSFs and KPIs for financial management for IT services:

• Critical success factor: “The existence of an enterprise-wide framework to identify, manage, and communicate financial information, including the cost and associated return of services.”
  • KPI: The existence of established standards, policies, and charts of accounts, which enterprise financial management requires all business units to use and comply with. Audits will indicate the extent of compliance.
  • KPI: The financial management for IT services framework specifies how services will be accounted for; regular reports are submitted and used as a basis for measuring the service provider’s performance.
  • KPI: The production of timely and accurate submission of financial reports by each organizational unit.
• Critical success factor: “The requirement for the service provider to be able to account for the money spent on the creation, delivery, and support of services.”
  • KPI: The service provider uses an accounting system, and this is configured to report on its costs by service.
  • KPI: The provision of regular reports on the costs of services in design, transition, and operation.

Challenges

Challenges for financial management for IT services are as follows:

• Financial reporting and cost models that focus on the cost of infrastructure and applications rather than the cost of services make it difficult to communicate the value of services.
• While financial management for IT services must comply with enterprise standards and policies, its chart of accounts and reporting should be appropriate for an IT service provider.
• An organizational focus on cost saving rather than cost optimization leads to cost-cutting rather than demonstrating return on investment and value.
• When the process is first introduced, it may be difficult to find where financial data is located and how it is controlled.
• The process is reliant upon planning information provided by other processes.
• Difficulties can be experienced by internal service providers when introducing charging. This requires a change in culture and in how its success is measured, especially the need to articulate value in relation to alternative service providers. There is a possibility that the users may become more demanding as a result of being charged.
• There is a need for external service providers to balance the cost of services with the perceived value of those services to ensure the correct pricing models. The correct price must be higher than the cost, but it must also reflect the value to the customer (what the customer is prepared to pay for the service).

Risk

There are a number of risks to financial management for IT services:

• The introduction of dedicated financial management processes for an internal service provider may be viewed as unnecessary, even though the cost of a bad investment decision about the type and level of services offered can far outweigh the costs of implementing the process.
• A lack of adequate financial management processes for IT services may lead to penalties for noncompliance.
• There may be no staff in the organization who understand both IT and finance.

Exam Essentials

Understand the principles and techniques of service strategy. You will need to be able to understand service strategy principles, techniques, and relationships and their application for the creation of effective service strategies.

Understand the service strategy processes of strategy management, service portfolio management, and financial management for IT services. You need to understand, from a management-level viewpoint, the purpose, objectives, scope, principles, and activities of strategy management for IT services, service portfolio management, and financial management for IT services.

Be able to describe the contents of the service portfolio and their relationship to the lifecycle. It is important to be able to identify the various components of the service portfolio. It comprises the service pipeline, the service catalog, and retired services. You need to be able to describe how each of these interfaces with the rest of the service lifecycle and the processes from the other lifecycle stages.

Understand the business value, challenges, and risks of each process. You should be able to explain the value the business derives from each process and the challenges and risks involved in running the process.

Understand the key activities of financial management. You will need to be able to identify the purpose, objectives, and scope for financial management. Remember the three main areas: budgeting, IT accounting, and charging. Financial management is crucial for the calculation of value for services.