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Identifying Cost Savings with Service-Based IT Cost Modeling

By Reginald Lo

ReginaldLo-cropResponsible service provisioning requires an appropriate balance between quality and cost. But this balance cannot be achieved without a clear understanding of the service costs and the relationship between cost and service levels. With this knowledge comes the power to make decisions on where and how to spend to reach the desired balance.

To achieve this, you need to:

  • Create a cost model for a service and thereby
  • Understand what contributes to costs
  • Provide levers and/or options for the business to control costs within acceptable service levels.

The major activities in this approach are:

Reg-service-based cost modeling

The availability of the right information, along with processes and procedures for capturing and maintaining the information, is critical to the success of this approach. However, I have found that many of my customers do not have all the information they need and their information processes usually need to be strengthened. Hence, you may want to conduct a pilot first with a small subset of services, identifying the information and process gaps, and creating and executing plans to address the gaps, before applying this approach to a broader set of services.

This approach can be used prior to or in parallel with a cost transparency / show-back / charge-back IT financial management assessment to prepare your IT organization to track and understand service-based costs and help prepare the business for taking a more direct role in making IT cost decisions. It provides the business with levers to control their IT spend.

IT cost modeling is not simple – information may be missing and creative solutions may be required to estimate certain costs; policies need to be established on how to categorize and track costs, and repeatable procedures for creating and maintaining the cost model must be established. However, if IT cost modeling is done well, the benefits of true transparency and effective cost controls can far outweigh the challenges.


Reginald Lo is Director of Service Management Transformation with VMware Accelerate Advisory Services and is based in California.

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