A Quantitative Approach to IT Investment Allocation to Improve Business Results

Transcription

1 A Quanttatve Approach to IT Investment Allocaton to Improve Busness Results Antão Moura, Jacques Sauvé Departamento de Sstemas e Computação Unversdade Federal de Campna Grande Campna Grande, Brazl {antao,jacques}@dsc.ufcg.edu.br João Jornada, Eduardo Radzuk Hewlett-Packard-Brazl Porto Alegre, Brazl {joao.jornada,eduardo.radzuk}@hp.com Abstract Ths paper proposes usng fnancal loss functons to estmate the mpact that IT Servce Level Agreements (SLAs) have on busness process performance. For that, an organzng framework based on Balanced Scorecard concepts s frst presented to te those functons to strategc busness processes; and then, the mpact of servce levels on busness performance s estmated usng quanttatve technques from management scence. The result s a quanttatve approach for SLA objectve settng and nvestment allocaton to mprove busness results. The approach serves as decson support for nvestment polces wthn an ITIL Fnancal Management for IT Servces context. Applcaton to the case of a drugstore chan showed that the approach s nstrumental n analyzng complex IT servcebusness process nterdependency scenaros. The approach helped the chan s executves dentfy and recommend whch IT servces should receve nvestments. Index Terms servce level agreements, polcy-based management, Informaton Technology Infrastructure Lbrary, fnancal management of IT servces. I. INTRODUCTION Over the years, nformaton technology (IT) departments and external provders have faced the challenge of provdng support effcently and n a cost-effectve way to corporate users and clents. IT support has now become msson-crtcal to most busnesses. Addtonally, demand for IT servces has grown due to requrements of corporate nvestors and regulatng agences. More recently, t s becomng common to expect that IT servces also aggregate value to the busness: they are expected to contrbute to busness goals, results and overall corporate governance. Such expectaton s attested by the ntroducton of Control Objectves for Informaton and Related Technologes (COBIT) [1] and Sarbanes-Oxley (SOX) Act [2] complance requrements. To meet ths ncreasng challenge, IT management methods ncludng tools and processes have had to evolve n maturty. IT management has become more user-centrc and less provder dependent wth the popularty of the practces recommended by the process-orented Informaton Technology Infrastructure Lbrary ITIL [3] framework. Other IT management frameworks have been developed on the bass of ITIL by HP, IBM and Mcrosoft, among others [4]. Current ITIL processes are organzed nto 5 modules: securty management; IT & communcaton nfrastructure management; applcaton management; servce support (ncdent, problem, confguraton, change and release management processes); and servce delvery (servce level, capacty, avalablty, contnuty and fnancal management for IT servces). A new module s to be added to address plannng and mplementaton programs to optmze IT Servces Management [4]. Table 1: Lst of acronyms used n the paper Acronym Meanng ABC Actvty Based Costng BP Busness Process BP C Customer-facng BPs BP IO Internal Operaton BPs BP LI Learnng and Innovaton BPs BP F Fnancal BPs BSC Balanced Scorecard CEO Chef Executve Offcer CIO Chef Informaton Offcer CMDB Confguraton Management Database COBIT Control Objectves for Informaton and Related Technologes CRM Customer Relatonshp Management EP Evaluaton Perod EVA Economc Value Added IT Informaton Technology ITIL Informaton Technology Infrastructure Lbrary MPO Mssed Performance Objectves POT Performance Objectve Tme functon QoS Qualty of Servce ROI Return on Investment SCM Supply Chan Management SKU Stock Keepng Unt SLA Servce Level Agreement SLO Servce Level Objectve TCO Total Cost of Ownershp A core ITIL nstrument s the Servce Level Agreement (SLA) by whch certan promses are made to customers about the qualty or performance objectves of the servce provded and how the provder s to be compensated / penalzed. SLAs may be supported ether by external provders ( outsourcng ) or by an organzaton s own nternal IT Functon or Department. Examples of SLA contracts some of whch are nternal to IBM whle others are outsourced to Earthlnk ( and Worldcom ( can be found n [5]. Outsourced SLAs appear to be an nterna-

2 tonal trend. The entre IT functon of a clent ncludng support to ts strategc busness processes (BPs) may be outsourced to one or more provders [6]. Servce Level Objectves (SLOs) have tradtonally been set havng techncal measures (such as throughput, avalablty or response tme) as objectve functons. From a busness pontof-vew, t makes sense to establsh polces that set SLOs accordng to busness goals. In fact, recent research efforts have started to look nto IT management processes from a busness perspectve [7-9]. These efforts have produced mproved busness results (such as ncreased revenues and reduced costs). Such research efforts however, have concentrated on processes other than those for fnancal management. Aspects of the fnancal management of IT servces process doman a doman n whch busness executves have a natural nterest and n whose context they negotate nvestments wth IT personnel are n need of nvestgaton. Ths paper contrbutes to the nvestgaton of some of these aspects. In fnancal management of IT servces, a shareholderfocused or COBIT-adherent budgetng polcy wll prortze allocaton of resources to IT servces accordng to ther busness mpact. For that, the Chef Informaton Offcer (CIO) has to evaluate and manage IT resources and servces by ther fnal mpact on the busness. In other words, gven that a CIO has X amount of dollars to pay for the IT nfrastructure and servces that support contracted SLAs over the next fscal perod, how should the CIO dstrbute such amount among the several outsourced or nternal contracts, mappng the spendng to the busness? Whch servces should receve more funds to mprove ther performance (fewer SLA volatons)? How may Servce Level Managers go about nformng or changng SLOs for new SLAs or those up for renewal so that busness results wll lkely mprove? These are not trval tasks and they have to be consdered anew every tme busness goals change or results turn out dfferently from expected whch may not be nfrequent. The busness mpact of IT outages and faults depends on complex relatonshps between IT nfrastructure, IT servces, busness processes (BPs) usng these servces and the busness unts that employ BPs to add value to the busness. Lnkng these to busness results s another hurdle to be overcome. Ths paper proposes an approach to assst the CIO / Servce Level Managers n makng such lnkage. The proposed approach uses fnancal loss functons to numercally estmate the mpact that IT SLA volatons have on the busness. Busness-IT lnkage s enacted through busness processes (BPs). For that, an organzng framework based on Balanced Scorecard (BSC) concepts [10] s frst presented to te those functons to busness processes. Next, the mpact of servce levels on busness performance s estmated usng quanttatve technques from management scence. Investment targets are then elcted accordng to an mpact rank. The result s a quanttatve approach for allocatng IT nvestments to reduce potental fnancal loss. Applcaton of the approach to the case of a drugstore chan helped analyze complex IT-BP relatonshp scenaros and produce decson support consdered to be useful and algned wth top executves percepton of the chan s IT nvestment needs. The case study also ndcated that the approach can be partcularly useful to IT-unknowledgeable busness executves or to busness-nave IT personnel alke. The remander of the paper s organzed as follows. Secton II dscusses related work n order to set the one here n proper perspectve. Secton III summarzes the steps n the proposed approach. Secton IV presents the organzng framework upon whch the proposed approach sts. Secton V addresses a soluton for the loss functon consdered. Secton VI reports on the case study. Conclusons follow n secton VII. A lst of acronyms s provded s Table 1 to help the reader who may be unfamlar wth them. II. RELATED WORK Several works relate to the contents of ths paper. Frst we revew papers on IT plannng and nvestment decson support n general; then, papers that address defnton of SLA contracts; and, fnally, papers on IT (SLA) management polces. Research efforts on more general plannng aspects for IT (.e., not lmted to ITIL servces nor to fnancal management) from a busness perspectve have focused on IT busness algnment ssues, strategc aspects n partcular. A notable example s [11] where a BSC-based framework for an ntegrated busness and IT plannng and evaluaton process s proposed. The paper addresses two problems: tme lag (IT usually lags busness plannng) and IT-busness communcaton. For addressng the frst, the authors propose common performance measures and measurement procedures; and, for the second, that some measures be monetzed. The framework s non-numerc : t offers no IT-busness quanttatve measure mappng procedure, be t a concse mathematcal formula or detaled smulaton. Our approach s quanttatve n nature and targets budgetng aspects of IT plannng; t could add a quanttatve analyss capablty to that n [11]. Support for IT nvestment decsons has been consdered by several authors [12-17]. Most of the work s meant for consumpton by busness executves and concentrate on examnng the potental return [13] for the busness of nvestments n IT projects of varyng scale, from naton- [1], ndustry- [14] and corporaton-wde [15] down to the project level [16]. Dutta and Roy [16] propose to lnk IT projects to busness benefts by capturng nteractons n the busness process flows n whch they are embedded. A system dynamcs soluton technque s used. The lterature also documents other more elaborate technques from Management Scence Return On Investment (ROI), Total Cost of Ownershp (TCO), Economc Value Added (EVA) and Actvty Based Costng (ABC) [1], Informaton Economcs [18], BSC [20] and Realoptons Theory [21]. These papers deal wth determnng the value of nvestments n proposed IT projects - yet to become products or servces. By contrast, our work s ntended for busness and IT executves alke, facltatng ther communcaton; t uses smple management scence technques (more elaborate technques offer underlyng support but need not be explctly employed) and concentrates on dentfyng opportu-

3 ntes for nvestments n functonng IT servces subject to SLAs. SLA contracts are the focus n [6][22]. Schmdt [22] combnes servce contracts to workflow concepts. The use of the customer's busness processes as a bass for the contract ensures a customer-orented servce vew. Workflow concepts allow both specfyng non-ambguous contracts and constructve nstructons for usage and management of servces by the customer. Usng Transacton Cost Theory and Incomplete Contract Theory on sx case studes and ntervews wth contract managers and legal experts, outsourced SLA contracts have been studed n [6] to provde nsght nto 3 mportant tasks: dentfcaton of possble future scenaros for ncluson n contracts (ths s dffcult due to the ncompleteness of the contract); cost analyss n an outsourcng versus nternal decson (market conformty) and costs of transton to another suppler. The paper consders the busness measure of cost but not n a quanttatve manner and ts scope does not nclude defnng of SLA contract clauses (such as SLOs) nor selecton of IT servces for SLA contractng and correspondng nvestment. Our nterest here s to assst n settng SLO clauses n SLAs to reduce busness loss. As such, our work complements both [6][22] as support for SLA specfcaton - t s curous to note that a BP context s ndcated n [6] as of mportance for further development of the contractng topc. Autonomous IT management decsons usng polces to maxmze the busness value of IT servces are dscussed n [7,23,24,25,26,28]. Dao, Hellersten and Parekh [7] propose an elegant approach for automated enforcement of SLAs by usng IT level feedback loops to maxmze profts revenue as percentage of completed transactons mnus rebate to customers who experence bad Qualty of Servce (QoS). The paper [24] proposes revewng SLAs and the enterprse IT balanced scorecard n order to keep the cost of elctng knowledge about the busness value of the servce low (nformaton on SLAs may be obtaned from the Confguraton Management Data Base CMDB as defned n ITIL Confguraton Management process). IBM s paper [25] also consders the dynamc and autonomous optmzaton of IT nfrastructure parameters (such as polces that attrbute traffc handlng prortes) accordng to hgh-level busness objectves (such as revenue ncrease). Optmzaton polces for a shared utlty computng envronment whch supports multple thrd partyapplcatons subject to SLA performance targets n terms of maxmum throughput and mnmum response tmes are consdered n [26]. The resultng model s solved usng mathematcal and smulaton technques (Lu et al. [27] solves the problem of optmzng SLA profts usng a queung theoretc model but does not address the dynamc workload characterstcs). Menascé at al. [28] descrbe a polcy for web server resource management that tres to ncrease revenue by attemptng to reduce the number of users that defect due to poor ste performance. In the sense of usng SLAs and BSC aspects, the approach n [24] s very smlar to the one here. The ntended or underlyng applcaton n these papers however, s that of automated management for utlty computng envronments and not n nvestment polces to be followed off-lne, by humans when allocatng funds to pay for better busnessalgned SLAs. Optmally choosng SLOs from a busness perspectve by ponderng the cost of the IT nfrastructure needed to support the IT servces and the losses ncurred from servce degradatons s consdered n [9]. The focus s on capacty plannng SLM nterdependences. In general, these last papers on SLA management polces tend to adopt the servce provder perspectve; usually offer detaled modelng of SLA aspects only (but no enterprse wde treatment of BPs and ther supportng IT servces); and to address aspects of IT operatonal processes (ncdent and change management processes are recent hghlghts). It s only natural that t be so snce front lne IT servce admnstrators functon frequently n frefghtng mode and utlty computng requres on-the-fly self management features, notably self reconfguraton and self healng ntally. As R&D efforts evolve to encompass a fuller set of ITIL processes and mgrate to a deeper, longer term busness perspectve, more comprehensve and extensve fnancal management support approaches wll come nto focus. Ths paper proposes one such approach. The approach proposed n the next sectons s based on quanttatvely assessng the potental busness loss due to SLO volatons to determne whch BPs are n most need of better IT servces. In order for the dentfed servces to have less frequent SLO msses or strcter SLOs, approprate fnancal resources are to be allocated to them, accordng to an organzaton-wde loss rank. III. AN APPROACH FOR SUPPORTING INVESTMENT DECISIONS TO FINANCE SLA EXECUTION The approach for decson support n Fnancal Management of IT Servces presented here ams to keep the cost of modelng IT-busness relatonshps low, so that people usng t partcularly top busness executves - may feel comfortable wth t. To that end, a BP organzng framework and a smple quanttatve loss analyss are developed. The problem to be solved s one of recommendng how to deal wth SLAs so as to reduce the expected corporate loss due to ther volatons. To address the problem, the proposed approach lsts the followng steps: Classfy and wegh BPs accordng to ther mportance to busness results. For each BP, dentfy supportng IT servces and assocated SLAs. Estmate the total potental loss due to SLA volatons as a functon of the duraton of such volatons for each BP n a gven class. Repeat for all classes. Rank classes and for each class, rank BPs accordng to losses. Wthn the doman of Fnancal Management of IT Servces, adopt polcy that allocates funds to reduce SLA volatons or to adjust SLOs of IT Servces supportng hgher ranked BPs. Once proper fundng s budgeted and appled n step 4, go back to montorng SLOs (through IT ncdent / servce level

4 management processes) and estmate busness losses as set n step 2. By loopng through the above steps, one does n effect get an offlne, human enacted fnancal closed loop control polcy for IT servces management. The nucleus of the approach s step 1: dentfyng and classfyng key BPs of the organzaton. Such knowledge has to be elcted from busness executves. Our experence wth the case study shows that t helps to have a rough draft of BP classfcaton to motvate dscussons. BP classfcaton s carred out wth the ad of the organzng framework n the next secton. Secton V presents the analyss for loss estmaton needed n step 2. The case study n secton VI llustrates steps 3 and 4. IV. AN ORGANIZING FRAMEWORK The concept of BP classes s borrowed from the 4 BSC [10] perspectves: fnancal, customer, nternal operatons and learnng & growth. Here, BSC concepts serve the only purpose of facltatng IT-busness personnel communcaton by arrangng BPs n a class structure whch s famlar to many busness executves. The 4 classes adopted n the framework correspond to the 4 BSC perspectves. These 4 classes allow for the applcaton of the engneerng prncple of separaton of domans (or modularzaton ) when complex problems are addressed. It seems easer for busness executves to dentfy BPs and wegh ther relatve mportance to busness results by consderng ther role wthn a gven class nstead of tryng to have an organzaton-wde vew whch s obtaned by aggregatng all classes. BP classfcaton s smplfed especally f the class beng consdered corresponds to the corporate responsbltes of the executve beng addressed such as sales & marketng n the customer class or fnancals. Furthermore, our choce to base the organzng framework on BSC s supported by Grembergen s argument that BSC may be the preferred choce to gude busness-orented IT decsons [30]. Note however, that the organzng framework does not need orgnal BSC complance. There s nether ntent or need to adhere to any BSC characterstc nor to produce full BSC delverables, such as drver-outcome dependences and strategy maps. Organzng BPs nto classes makes t easer to determne the mpact of SLA volatons on the BPs. The classes can also be used to plan mprovements to the servces accordng to strategc corporate goals. Informaton on IT servces supportng BPs may be obtaned from the CMDB. The framework defned here does not lmt ts applcaton to the tradtonal BSC model. A BP may be made to belong to more than one class. For smplcty of dscusson and due to the characterstcs of the case-study ahead, we assume a BP to belong to one class only. The framework conssts of three layers as llustrated n Fgure 1. The BP layer sts on top of the IT servces layer. The model requres nformaton on the performance levels of the IT servces that support the classfed BPs. Informaton on IT performance s n the form of nformaton on IT SLA volatons such nformaton may be extracted from databases mantaned by ncdent and/or servce level management processes. The BP layer maps IT SLA volatons onto BP Mssed Performance Objectves (MPOs). The top layer represents the busness or the entre organzaton tself. The model for ths layer provdes for the classfcaton of mportant BPs nto 4 BP classes and maps MPOs onto busness measures whch, n ths case, are estmates of potental busness loss. BPs Potental Busness Loss Busness Layer 4 Organzaton-wde BP classes Mssed Performance Objectves (MPO) BP Layer (w, POT, EP, =1,2,, N) SLA Volatons IT Servces Layer IT Servces that support BPs wth SLAs Fgure 1. IT Servces-Busness Organzng Framework The organzng framework calls for: The establshment of relatve prortes among the BPs wthn each BP class by attrbutng a weght to each BP accordng to ts contrbuton to busness results. A performance objectve tme functon (POT) for each BP. An Evaluaton Perod (EP) for each BP. There are 4 BP classes: 1. Customer class conssts of all customer facng BPs,.e., BPs that assst customers drectly n ther nteractons wth the enterprse. These nclude, but are not lmted to, Customer Relatonshp Management (CRM), e- commerce, sales, post-sales servce and order trackng BPs. These BPs are also known as front offce BPs [31]. The set of BPs n ths class wll be henceforth referenced as BP C. 2. Internal Operatons class made up of BPs that support the enterprse s producton and delvery of goods or servces drectly. Typcal BPs n ths class are those supportng buld to order, servce provsonng, manufacturng, Supply Chan Management (SCM), qualty control and shppng & handlng. BP IO represents the set of BPs n ths class. 3. Learnng & Innovaton class encompasses BPs whch assst tranng of human resources, R&D efforts and plannng & acquston of captal goods for enhanced technologcal support. These can nclude collaboraton, e- learnng and R&D BPs. The set of BPs n ths class s denoted by BP LI. 4. Fnancal class. The set of fnancal BPs s referenced as BP F. These are the BPs used for fnancal purposes such

5 as those supportng credt checkng & approval, nvocng, accounts payable & recevable, budgetng. Relatve BP mportance uses a weght w attrbuted to BP n each set above. w s to be attrbuted accordng to the (perceved or hstorc) contrbuton or prorty BP has to the results of ts class. Notce that mportance nformaton could possbly be nferred from a BP s contrbuton to revenue generaton, number of nternal users, customers nvolved or some other crtcalty feature and may have to be gathered / updated perodcally to account for changes n busness envronment and corporate goals. More on ths when the case study s dscussed n secton VI. The weghts of all BPs of a perspectve sum to one, thus makng the weghts relatve wth no semantcs attrbuted to ther absolute values. A BP may be n more than one class. For example, a customer may be unsatsfed when he looks for a product that s out of stock; ths out-of-stock event may be caused by an Internal Operaton BP malfunctonng. For smplcty, ths stuaton s not consdered here. Observe that falure of an nvocng process may stop customer servce momentarly. So wll falure of a shppng & handlng process. These observatons, however, should not mply that each of these BPs s to have equal weght n the customer class. In the long run, each of these BPs contrbutes to customer satsfacton, but based on customer surveys for nstance, the former may be attrbuted lower mportance (weght) than the latter. IT-BP lnkage s modeled through a Performance Objectve Tme Functon (POT Functon) and an Evaluaton Perod (EP) for each BP n each set. BP s attrbuted ts own POT Functon (POT (t)) accordng to ts postve nfluence on busness results for ts class. For nstance, CRM BP s to be fully functonng (as ndcated by some BP performance metrc) Monday to Frday durng busness hours durng an entre fscal year. In ths case, the Evaluaton Perod for the CRM BP = 1 year. POT Functons may be defned accordng to baselnes or expected behavor over the Evaluaton Perod assocated wth the BP. BP Mssed Performance Objectves, MPOs, result from SLA volatons n the supportng IT servces. A BP may have several MPOs of varyng duratons over ts EP, as we wll see, cumulatve loss estmatons requre the duraton of each MPO. The organzng framework thus classfes BPs among 4 BP classes and, wthn each class, models BP as a tuple {w, POT (t), EP }. Note that a BP MPO may cause busness loss. V. LOSS ESTIMATION Loss s an adverse busness mpact and under the vew taken here, losses may result from SLA volatons. Due to the complexty of relatons between IT and busness actvtes and contngency plans that may take effect upon IT faults (use of phone, fax or paper recorded data), precse mathematcal equatons for loss due to IT performance degradatons or stoppages are not easly derved. Here, we settle for dervng estmates of potental loss. It s mportant to stress that loss estmaton depends on the type of BPs beng affected. For nstance, faulty shppng & handlng BPs may cause loss due to mountng nventory of Stock Keepng Unt (SKUs) whch are not shpped. A broken producton BP may cause loss due to SKU non-producton. Regardless of these dfferences, potental loss estmates have common components arsng, for nstance, from stopped servce provsonng or from stopped producton or sales of goods. Note also that potental loss measures could be estmated va smulaton nstead of mathematcal analyss. Smulaton can account for far more detals and nterdependences that the mathematcal treatment used n ths secton. On the other hand, we feel that even a smpler mathematcal analyss of IT-Busness relatons helps one to grasp the dynamcs and dependences of BPs on IT servces more clearly. Ths secton offers an ntal and llustratve analytcal soluton to fnancal loss functon. The case study wll show that the approach can be useful. In general, an MPO does not mpact loss mmedately: exstng nventory may allow for compensaton of a degraded manufacturng BP; alternatve servces such as phone or fax may substtute for IT servces such as e-mal or fle transfer; a malfunctonng R&D BP may be compensated f there s stll slack untl the launch date and so on. In the mathematcal treatment, we account for BP slack by taggng a tme delay ( ) to loss rate estmates. Also, defne that the customer class BPs whch suffered MPOs durng ther EPs compose the subset C IO BP. Smlarly, defne MPO BP, LI MPO BP and F MPO BP. For BP MPO belongng to one of these subsets, let τ j denote the duraton of ts j th MPO whch happened durng the BP s Evaluaton Perod (EP ). In order to smplfy the equatons, we assume that all BPs have the same EP (year, quarter,...). Let BP have M MPOs (M can be zero). Fgure 2 brngs a scenaro wth M = 2 and the MPO duratons τ 1 and τ 2 to help clarfy the development ahead whch derve an estmate of potental loss for the BPs n each BP class. For brevty n the text that follows, we use loss to mean estmate of potental loss. Performance τ 1 τ 2 MPO 1 MPO 2 BP (Actual) Performance Performance Objectve Tme Functon - POT (t) EP = EP

6 Fgure 2. Illustraton of loss calculaton for BP and M=2 Whle dervng the loss functon, please be aware of the fact that quantfyng a lnk between a leadng ndcator and a dependent varable s partly tral and error [19 p. 107]. Tryng to lnk IT faults (such as those that lead to an SLA volaton) to adverse busness mpact (such as an ncrease n loss) s no dfferent. Solutons for a gven BP class presuppose the combnaton of the rgor of mathematcal analyss wth the strength of manageral experence. Even f the result s an estmate at best, the quanttatve technque presented wll provde a framework for thnkng about the problem. As commented n [32 p.140]: Decson makng becomes much tghter as soon as the uncertantes can be quantfed, no matter how vaguely. Or as aptly put n [4 pp.133]:.. understandng the ssues s more mportant than beng able to determne costs to the penny. Frequently, one would lke to estmate mpact (loss) n fnancal terms. But bear n mnd that busness measures need not be fnancal n nature: one can envsage non-fnancal busness measures such as number of affected people or busness processes or mssed deadlnes although these measures lead to a dollar value ndrectly (eventually). Although dangerous as far as precson s concerned, monetzng the mpact measures seems to sharpen one s responses remarkably [32 p. 142]. We monetze loss estmates here. In dervng the equaton for loss n a gven BP class, we sum all losses due to all BPs whch experenced MPOs durng EP n the gven class. The loss arsng from one such BP s the sum of losses durng each MPO the BP ncurred.e., the sum of [potental loss rate caused by each MPO each MPO duraton BP weght]. BPs of nterest here are drectly supported by IT servces. We assume that condtons on an IT servce performance metrc (such as avalablty and response tme) are mposed and montored, as prerequste for good BP performance, n the form of SLAs. We need to map IT SLA volatons to an estmate of loss. Loss s smply an ndcaton of the adverse mpact that bad BP performance caused by IT servce malfunctons has on the busness. For no SLA volaton, the potental loss should be 0. Loss s actually a rate at whch loss s nstantaneously accumulated at any gven nstant n tme. Accumulated loss s another mportant metrc snce t captures the adverse mpact on busness when IT faults or consequently, BP performance degradatons, are not resolved over a perod of tme. Whle rate of loss may reman constant over ths perod, accumulated loss wll steadly worsen. We now need to estmate loss rate for all BP classes. One reason for classfyng BPs s exactly to better capture loss estmates. We now descrbe how loss can be estmated for BPs n each class: Customer class - If a customer experences BP malfunctons (MPOs), the effect s lkely a decrease n revenue. The potental revenue rate (n $/tme unt) from customers usng BP at tme t s β C (t). Note that ths rate s a functon of tme snce t may depend on the tme of the day (for nstance, t may be applcable to regular 9-to-5 busness hours only) and s usually seasonal. Note also that there s normally a delay between cause and effect,.e., when an MPO for BP BP C occurs, β C C (t) wll be affected after tme unts. Internal operatons - If an nternal operatons BP malfunctons (causng MPOs), we lower productvty. There may be loss caused by non-provded servces, stockng delays, or non-produced goods due to BPs wth unacceptably degraded performance. Let BP IO be the set of BPs n ths class and β IO (t) represent the potental revenue rate whch would have been generated by goods or servces whch were not provded, sold or produced due to malfunctons n Internal Operatons BP at tme t. The effects of an MPO on β IO (t) appear after a delay of tme unts. IO Learnng & nnovaton Losses here appear possbly from ncreased tme-to-market or from mssng sales opportuntes due to the delayed new product, servce or promoton. Losses are due to such mssed sales or revenue. Assume the cost of the R&D nvestment to launch a new product or servce due to delayed tme-tomarket s neglgble when compared to the loss of mssed sales or revenue and that each MPO delays product or servce launch exactly by ts duraton. Let β LI (t) be the estmated rate of sale of new (nnovatve) goods or revenue from new, nnovatve servces and the cause-effect delay. LI Fnancal Losses arse from not earnng nterest on pad customer nvoces or payng nterest on loans to honor accounts payable whch were delayed due to cash flow drop caused by late payments, that s, a negatve effect on the busness fnances or fnancal loss. Make β F (t) and represent the potental nterest to F be pad or mssed captal gan rate (n $/tme unt) due to malfunctonng fnancal BP at tme t and the delay between cause and effect to such rate, respectvely. From the above arguments and defntons, we wrte: Loss k = M k BP BP j= 1 MPO w t τ j k k β ( t + ) dt (1) for k {C, IO, LI, F}. Equaton (1) s the loss functon needed by the approach. A few comments regardng the applcaton of ths equaton are n order. For Internal Operatons, Equaton (1) mples that all nonprovded servces would generate revenue or n a manufacturng settng, that all non-produced goods would be sold. Note also that productvty loss causes the fxed cost to be dstrbuted over all goods eventually produced, thus ncreasng the total unt cost. Ths, n turn, causes a decrease n proft (or a loss ncrease, gven that unt prces do not change). Cost dstrbuton was not taken nto account n (1).

7 Customer BP C ={CRM, Sales} wth w CRM = 0.7 and w Sales = 0.3 BP C MPO = {Sales}; ths BP s supported by ntranet connectvty and data base (DB 1 ) servces whch are subject to 99,95 % avalablty SLAs (EP = quarterly) Internal Operatons BP IO = {Inventory Control, SCM} w Iventory = 0.4,w SCM = 0.6. BP IO BPO = {SCM}; the SCM BP s dependent on the SCM applcaton, Web server remote access and DB 2 servces, each wth a 99,95% avalablty SLA (EP = quarterly) BP F ={Invocng, Accounts Payable & Recevable} wth w Invocng = 0.9, w APR = 0.1 BP F MPO = {Invocng}- whch uses a prntng spool servce, ntranet connectvty and the DB 1 servces whose SLAs specfy 99.99% avalablty n the frst 2 busness days of every month (EP = quarterly) Fnancal Fner graned detals of the Learnng & Innovaton BP class are not smple to be accounted for. The mpact of a new product or servce vares accordng to the level of nnovaton t brngs along. Further, the lfe cycle of the product or servce portfolo as a whole ncludng exstng and new products or servces may have to be consdered: losses may be caused by launch delays for a new product or servce as well as revenue fall off of agng products or servces. The total Overall (Potental) Busness Loss due to SLA volatons, Loss SLA, s defned here as the total accumulated loss over the evaluaton perod (EP). It s obtaned by addng the losses from the 4 BP classes,.e., SLA C IO LI F Loss = Loss + Loss + Loss + Loss (2) As for obtanng parameter values, BP weghts may be set through the Delph method [33]: company executves ndvdually estmate the weghts, combne ther estmates, and choose the best ones. Duratons of MPOs (τ s) may be measured, gathered from logged data or mapped from the duratons of IT SLA volatons. As the case study llustrates, there s usually an amplfcaton of duraton from SLA volatons to MPOs n the sense that a performance problem tends to last longer as t propagates upwards n the layers of Fgure 1. Approxmatng curves to β k (t), k {C, IO, LI, F}, may be accomplshed by examnng corporate hstorc data and adjustng these wth marketng executves projectons to brng them to present tme (ths procedure could serve to estmate the tme delays,, as well). One can attempt to value β F (t) by usng penaltes defned n legslaton and/or fnes typcally mposed by consumer protecton laws or ndustry regulatory agences; captal gans may be derved from hstorc or projected nterest rates publshed by fnancal agences. VI. A CASE STUDY Ths secton summarzes a case study of the applcaton of the approach to a drugstore chan (Redepharma) operatng 24 Learnng & Innovaton Fgure 3. BP Classfcaton n the case study BP L&I = {e-learnng, Collaboraton} w e-l = 0.5, w Collaboraton = 0.5 BP L&I MPO = {Collaboraton} whch depends on Internet access servces wth a 99,95% avalablty SLA (EP = quarterly) hours per day n several ctes n Brazl. The scenaro n Fgure 3 s based on the chan s operatons and the values were elcted from ntervews wth the chan s top management 1. Data collecton was conducted through ntervews wth Redepharma s personnel who dentfed the mportant aspects of the company s BPs and supportng IT servces usng open questons, followed by a dscusson to classfy each dentfed BP / IT servce n one of the 4 classes of the proposed framework. Closed questons were then used to dscuss each of the 4 BP classes n more detal. The absence of logstcs BPs from Fgure 3 s explaned by the fact that, at ths stage, clents pck merchandse up over the counter at each drugstore and supplers are responsble for delverng and handlng ordered products. Other overall average busness measures are as follows (and are assumed constant for smplcty): β C (t)=$20,000/hour; β IO (t)=1,500 goods/hour X $5/unt (assumng neglgble seasonal prce and cost varatons); β LI (t) =$2,000/hour (tme and seasonal dependences may apply to ths rate as well but wll not be consdered here) ; and, β F (t) = 4% per month. (the huge nterest rate s explaned by the fact that we are talkng about Brazl here). Sales on credt (by means of ther own Redepharma card) correspond to 20% of total revenues ($ 4,000/hour). Redepharma card holders are to be nvoced monthly; any SLA volaton causes payment (for the amount whch was not nvoced durng the ensung MPO of the nvocng BP) to be delayed by one day (yeldng a pro rata dem nterest loss of 1/30 * 4%). The mpacted BP MPO duraton (τ) 2 s 5 tmes that of the causng SLA volaton. Consder now, a stuaton where the BPs n the MPO sets n Fgure 3 have the supportng IT servces SLAs volated once per quarter.e., the duraton n hours, of the one MPO for each BP s equal to 5 * [(1-avalablty)* 90 days * 24 hours/day]. In ths stuaton, the CIO s requested to ndcate n 1 Actual values have been changed for confdentalty. 2 Here, a avalablty SLA volaton yelds a 64mn48sec nterrupton of the IT servce whch s amplfed to τ = 5h24mn (over a quarter).

8 whch IT servces should the company nvest money to mprove busness results? The answer to the above queston s not trval. As ponted out by Redepharma s CEO, the above scenaro and stuaton seem equvalent to a plate of spaghett. One cannot see any clear nor mmedate cause-and-effect relatons. Nevertheless, the approach proposed n ths paper offers nsght nto the stuaton, by structurng t as n Fgure 3 and by yeldng the ntal values n Table 2. Table 2: Intal Redepharma s Quarter Potental Losses Loss C Loss IO Loss LI Loss F TotalLoss SLA $ 32,400 $ 24,300 $ 5,400 $ 17,280 $ 79,380 The qualty of IT servces n the depcted scenaro may lead to over $ 300,000 n yearly losses. Consderng the amount of potental losses n Table 2, Customer and Internal Operatonal BPs (and ther supportng IT servces) are natural targets for nvestment. It s mportant to note that the ndcaton of these two problematc perspectves and whch BPs to nvest n correlates very well wth the percepton and (prevous) strategc plannng gudelnes of Redpharma s top management. The company s CEO, Nelton Neves, acknowledges that ths percepton however, was only obtaned after several years of operatons n the drugstore busness. He sees potental n the model to assst a CIO that s less knowledgeable about the busness to dagnose IT busness mpact shortcomngs and set nvestment prortes more quckly. Ths correlates well wth the observaton n [11]:... a strong CIO partcpaton n strategy formulaton s not mandatory, as long as those who formulate the strategy are suffcently aware of the potental mpact of IT.... The proposed approach here offers exactly that mpact. The proposed approach also supports decsons on IT SLA budgetng, from a busness perspectve, even by those wth lttle IT profcency. In fact, the model shows that ncrementng the Customer and Internal Operatons IT servces to comply wth 99,99 avalablty SLAs, wll reduce corporate losses by more than 57% (avodng a $170,000 loss n a year), as shown by the new values n Table 2 (the fnancal BPs contnue n need of attenton, as ndcated by the now relatvely hgh potental Loss F ; another decson by Redepharma s to better ntegrate Internal Operatons BPs to Fnancal BPs). Notce that an ncrease n SLO threshold to boost busness results pays the prce of ncreased IT nfrastructure and servces costs to be determned by an ITIL equvalent capacty management process. Equaton (1) the loss functon does not take IT costs nto account, but could do so. Table 2. Quarter Potental Losses after nvestment Loss C Loss IO Loss LI Loss F TotalLoss SLA $ 6,480 $ 4,860 $ 5,400 $ 17,280 $ 34,020 In the case studed, the model was consdered by Redepharma s top management to be very useful snce t allowed the analyss of the stuaton of nterest and the support of management decsons concernng IT. The good correlaton between the nformaton provded by the model and the experence-based percepton of management ncreases one s confdence n the proposed approach when put to use for supportng Fnancal Management of IT Servces. VII. CONCLUSION AND FUTURE WORK Ths paper proposed a quanttatve approach to assst n the admnstraton of contractual relatonshps of nternal or external SLAs. The approach plays a role n establshng SLA thresholds and objectves and n supportng budget and contract revews, revealng ndrect costs (losses) of IT malfunctons. It correlates aggregated SLO msses (SLA volatons) over an observaton perod to potental fnancal loss n order to support nvestment plannng. The approach requres that Busness Processes (BPs) that are crtcal to busness results and these BPs dependences on IT servces be dentfed frst. To that end, an organzng framework, based on the Balanced Scorecard s 4 perspectves was developed. Ths framework s actually the means for capturng IT busness relatonshps and estmatng potental loss due to IT malfunctons. The mpact that IT servces performance degradaton has on the busness s modeled through the adopton of fnancal loss functons whch were solved usng quanttatve technques from management scence. BPs n need of mprovement n ther supportng IT servces are then selected n decreasng order of loss values. Fnancal management may n turn decde on nvestment optons. Applcaton of the approach to a drugstore chan, Redepharma, yelded promsng ntal results. It helped structure and analyze a real, complex scenaro of IT servce mpact on the busness, provdng nformaton about potental losses and hence, ndcatng better drectons for IT nvestments. Top management consdered the model to be very useful for analyzng relatons between IT and busness and for supportng executve decsons on where and how to nvest n IT servces n order to mprove busness results. The chan s CEO also beleves that the model could speed up the decson process by a CIO wth less busness experence. The approach serves to lnk Fnancal Management to other ITIL processes (ncdent and change management, n partcularl). By dentfyng costs and benefts of proposed changes to SLOs, the approach helps the CIO to evaluate and take reasonable rsks. It does not estmate nvestment amounts. These must be provded by Capacty or Servce Level management when creatng nfrastructure and servce desgn or capacty upgrade optons for the dentfed, enhanced SLAs. Some of the papers dscussed n secton II [9] address costng of such desgn / capacty optons from a busness perspectve. The paper contrbutes to aspects of budgetng polces of ITIL s Fnancal Management of IT Servces. Snce capacty provsonng and avalablty are nfluenced by cost nformaton (ncludng potental loss), ITIL s other management processes of Confguraton, Change, Servce Level, Capacty and Avalablty may also be served wth nformaton on expected fnancal performance provded by the approach when these subjects are made to consder a busness perspectve. One can

9 also see the approach supportng the dentfcaton of opportuntes for reducton of IT operatng costs Future work wll address the use of the approach n these other ITIL management domans. It s also of nterest to study the applcablty of a smlar approach to support nternal chargng polces establshed by Fnancal Management. In ths case, loss does not seem to be an approprate metrc; other functons such as revenue may have to be adopted and the analyss for valung them may have to consder perods of SLO complance nstead of SLO volatons. Consderng both the servce customer and provder partes to the SLA contract at the same tme n the approach (to compensate losses through penaltes) s another research topc to be nvestgated. Acknowledgements - Redepharma s wllngness to apply and scrutnze the proposed approach made ts prelmnary valdaton study possble. Ths work was developed n collaboraton wth HP Brazl R&D. VIII. 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