Pink Elephant Blog
Developing A Service Based Cost Model
The day you began your ITSM journey you began the march down a path that will inevitably lead to a requirement to do service based costing based on units of consumption rather than broad allocations. While IT struggles in many areas to become more proactive in the management and delivery of its services. This is nowhere more apparent then in the way that technology costing is typically done. Regrettably what usually occurs during the year is that all IT costs and expenses are collected into a large cost centre or proverbial bucket which at the end of the fiscal period gets upended on the table and then is divided up equally across the IT customers regardless of use. Unfortunately this practice leads to certain customers heavily subsidizing others and there is little to no ability to express accurate costs, let alone to provide an accurate tracking of how services are consumed. This practice provides limited ability to use costing as a management and planning tool since you cannot control or improve what you don't understand. From a customer perspective I cannot modify behavior of consumption based on a planed IT spend since there is no way to report or track actuals against a planned budget. An interesting comment that one often hears when speaking to IT organizations about the discipline of costing is that they are a “cost center” and as such, they are not in the business of charging for their services. This is often used as a convenient excuse to not attempt IT costing at any significant level of detail. However the logical response to these organizations is that even though they may not submit a formal bill to an internal business customer they still have to account for the cost of delivering IT services in order to receive next years budget allocation. Consider that perhaps charging is never really an option, since money has to be ultimately transferred to IT in order to operate. Perhaps what is really an option is the formality that this process takes. (a formal invoice or internal transfer of funds based on an approved budget) Recently this has become even more important with the current focus on cost reduction and financial governance. IT organizations are no longer being afforded the grace and latitude they once were, and the business is demanding an accurate accounting and tracking of IT costs related to use and consumption. Combine this with a requirement to justify the cost of internal IT Management versus the option of outsourcing and accurate Service Based Costing becomes a matter of survival. Troy's thoughts what are yours? “This planet has - or rather had - a problem, which was this: most of the people on it were unhappy for pretty much of the time. Many solutions were suggested for this problem, but most of these were largely concerned with the movements of small green pieces of paper, which is odd because on the whole it wasn't the small green pieces of paper that were unhappy.” ~ Douglas Adams
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Interesting thoughts!
In my experience, it is finance function which will actually have reservations for not tracking project-wise costs of IT. In large organizations, just the awareness of this cost is not a good enough reason to make changes in accounting practices.
One experiment involving notional charging failed too. There is no incentive - neither for finance nor IT in this. We used to call it ‘fun money’.
Only reason that could get things moving is being able to influence consumption. IT can make a strong case using facts on resource consumption patterns. This is a good case to make changes in accounting practices.
Ravi Putcha | December 26, 2006 at 5:09am
IT organizations are, increasingly, the subject of distrust from their customers - “the rest of the business” - as the rest of the business is being marketed to directly in the greatest disintermediation play in history - cloud.
It seems to me that if IT organizations cannot organize their services in a way that compares to outside providers, describe those services clearly, and provide management with credible evidence of total costs (and recoverable costs), then they leave “the rest of the business” no choice but to do their make/buy decisions on the basis of emotion - not evidence.
The “rest of the business” is being bombarded with marketing messages of cheaper, faster, better from organizations with very effective marketing departments.
Perhaps IT organizations should consider developing a trusting relationship by showing value and costs. Or update their resumes?
Cary King | January 23, 2012 at 6:54pm