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Monthly Archives: August 2015

From CIO to CEO: Financing your ITaaS Organization with Charge-back

Jason StevensonBy Jason Stevenson

In my latest CIO to CEO blogs, we discussed How to RUN and ORGANIZE an Information Technology as a Service (ITaaS) Provider. In this blog, we will discuss how to FINANCE an ITaaS Provider.

One of the loftiest goals as an ITaaS Provider is the ability to charge-back, or at least show-back cost of services. It can also be daunting to do so in a fair manner for all customers.

Leonardo da Vinci said “Simplicity is the ultimate sophistication” and Albert Einstein said “If you can’t explain it simply, you don’t understand it well enough.” In this blog I’ll walk through a quickly executable IT cost model to calculate Total Cost of Ownership (TCO), using mostly tools and data we already have, to establish a price that is:

  • Simple
  • Accurate
  • Equitable
  • Scalable
  • Agile

STEP 1: Establish Labor Costs

Bob worked 40 hours this week. 16 hours in support of services including day-to-day operations, online training every other day, and daily staff meetings. 24 hours were spent working on a migration for Project 2. All employees had a holiday the first Monday of this particular month. As it happens, none of our employees took any leave for the rest of the month. Out-of-office equals $0 cost and is excluded. The reason for this will become more evident when we discuss burdened rates.

IT Cost Model

Highlighted in blue, each project is associated with a service. It is important to note Project 2 is associated with Service B. The cost of Project 2 is derived from our employees’ wage and a rate of 1.5. The wage is multiplied by this rate to equal a burdened rate. Burdened rates reflect wages plus benefits and fee if any. Bob worked 24 hours on the Project 2’s migration in Week 2 per our example and contributed to Project 2’s cost of $5,724.00 this month.

Highlighted in orange, Bob worked 16 hours in support of services in Week 2 per our example. Tickets (requests, incidents, problems, changes, etc.) are associated with each service. Out of the 112 total tickets this month, 30 were related to Service B or approximately 27%. Using the number of tickets per each service and total labor for service gives us the cost of service. In this case, $17,172.00 * (30/112) = $4,599.64 for Service B this month.

Highlighted in green, the total cost of Service B labor for this month is $10,323.64 by adding $4,599.64 for project labor and $5,724.00 for service labor from our previous calculations. Our service organization must recover $36,252.00 this month for just labor.

IT Cost ModelIT Cost ModelIT Cost Model

STEP 2: Distribute Operational Expense

Services may require operational expenditures (OPEX) like: leases, utilities, maintenance, etc.; some of which may be indirect and need to be fairly distributed across services based on relative service size. By dividing subscribers of a service by the total number of subscribers we arrive at a fair percentage of monthly operational expenses for Service B of 28%. Indirect operational expenses for Service B are calculated fairly by $18,000.00 * (250/900) = $5,000.00.

Some expenditures are so large that the expense cannot be recognized at one point in time and need to be amortized (for example building a new data center). Depending on your model, this expense may be captured as either a project expense or an operational expense. In keeping our model simple, amortization should be used sparingly. When absolutely necessary, it should be used consistently by establishing a concise policy like “All expenses over $500,000 will be amortized (spread) over 36 months.” In our example, no expenses exceeded half-a-million-dollars and so amortization does not apply. However, if we had an Expense E of $1,750,000 for our new data build-out it would be recognized as $1,750,000 / 36 = $46,611.11.

CEO5

STEP 3: Calculate Total Cost of Ownership

Projects may require capital expenditures (CAPEX) beyond labor like: material procurements, suppliers of personnel, etc. plus travel. Project costs are often direct and simply added with project labor for total project cost. We can distribute these costs as well if needed. Total Cost of Ownership for Service B rises to $18,323.64 by adding capital expenses of $3,000.00 to our previous operational expenses and labor. Assuming our other services and projects require only labor, our service organization must recover $44,252.00 this month to remain solvent. Dividing Service B’s total cost by 250 subscribers gives us a cost of $73.29 per subscriber per month.

CEO6

STEP 4: Establish Charge-back

Our previously mentioned 250 subscribers of Service B is spread over four service customers (departments in this example) as 100 + 100 + 25 + 25 = 250. A fee of 7% which is the difference between our cost and our price. Recovery from each customer of their fair share of services. Department A has 100 subscribers of Service B; which equates to 100 * ($73.29 *107%) = $7,842.03. 107% is a representation of 100% of the cost plus 7% fee. Our previous Total Cost of Ownership of $44,252.00 is now a price of $47,349.64, allowing our service organization to not just be solvent but also profitable to enable research, development, improvement, etc. of services.

IT Cost Model

If the culture of your organization does not allow for your IT department to charge customers for service the same principles can still be applied. Remove the fee (7% in our example) and communicate the same information as Service Consumption Report rather than an invoice to provide show-back to your customers. Though they may not be paying for services you can still influence their behavior by giving them comparative analysis against their peers.

The following table summarizes charge-back using an IT Cost and Price Model.

IT Cost Model

In my next blog post we will explore tips for how to ensure, as the new “CEO” or your IT department, that your transition to an agile, innovative, and profitable service provider is a successful one.

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Jason Stevenson is a Transformation Consultant with VMware.

Organizational Change: Perfecting the Process

By Richard Hawkins and Greg Link

Organizational change. Re-org. Shaking things up.

These words strike fear into the hearts of those that hear them. They should also strike fear in those that speak them. But sometimes organizational change is needed for some very good reasons. One that comes to mind is structuring IT to deliver end-to-end services and not just applications.

To reduce the pain often associated with Organizational Change, it’s important to have a clear plan in place that addresses each stage of process.  In this blog we’ll take a look at the stages Organizational Change from beginning to end as a primer on what things need to be considered and when.

Everything has a process and Organizational Change is no exception. The diagram below is a high-level overview of each of the 5 stages of Organizational Change.

Organizational Change Process

Step 1:  Gather and Validate Data

In this phase we look at every level of the organization from the top down along with the skills of each role including that of leadership. Fact is, in many organizations poor performance is more a reflection on leadership than the departmental staff.

Step 2: Perform Organizational Assessment

To assess your organization’s readiness for change, there are a number of questions you need to ask yourself. When did the last re-org take place? What changes were made? How was it received? Is a short survey in order? How formal is your organization? Are there roadblocks that can be removed to allow staff to do their job more effectively? How strict are your policies? Obtaining a cultural baseline is not easy, but well worth the effort.

Step 3: Develop Transition Plan

As you start the planning effort, it’s important to justify the change.  Having a good case for why the organization is undertaking this effort will go a long way toward acceptance.  It’s also important to identify ahead of time what cultural barriers you could face blocking a successful change.

Throughout this stage, you should remember that this effort will affect everyone, so consistent communication is key, and involving many layers of the organization, from directors and managers down to “rank and file” in the planning process will go a long way toward ensuring everyone is on the same page.

Step 4: Implement the Plan

This is another busy stage and, of course, the most important. Proper execution of a well developed plan is the key to success in any endeavor.

Leadership roles should lead by example and be fully committed to the change, and that commitment to the goal must continue throughout every level of the organization.  The success of this effort relies on all parties playing their part.

Seek out areas that may encounter resistance and work tirelessly to resolve them with empathy and understanding. Ownership of a problem in this area may not be an individual mater. It may require senior leadership intervention.

This is another phase where communication, through every means possible, is extremely important. The organization should know how things are going and how issues are being resolved in a timely manner.

Step 5: Validate Plan Success

We’ve done a good job at planning and execution so we’re done right? The new structure is in place and no one has quit or expressed any serious dissatisfaction. But are we really done? A truly good manager says “no” and will look back and make sure the plan and implementation achieved the desired outcome.

Make an initial assessment on how well the organization is working after the changes have settled in. A well timed Town Hall will go a long way in gathering the information needed to validate the efficacy and results of the re-org. If as mass gathering is not an option, departmental meeting should be in order.

In our next blog, we’ll explore 10 of the key actions you need to take along each step of this process to ensure success.

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Richard Hawkins is a Transformation Strategist based in Seattle, WA.

Greg Link is a Transformation Senior Consultant based in Las Vegas, NV.

Establish Your IT Business Management Office (ITBMO) To Run IT Like a Business

Khalid HakimBy Khalid Hakim

We hear a lot about (and maybe have interacted with) Project Management Offices (PMOs), and possibly about Service Management Offices (SMOs), but IT Business Management Office (ITBMO) sounds like a new buzz word in today’s modern IT business taxonomy. PMOs typically focus on the management and governance of IT projects, while SMOs are responsible for the governance and management of IT services and the processes to ensure effective service delivery. ITBMOs, however, go beyond this to the next IT business maturity level to address business and finance partnership with IT to help IT organizations transform into services-based, business-oriented, and value-focused organizations.

ITBMOHave you ever asked yourself of how you can make your CFO happy? How you can support your corporate financial goals and aspects of a balanced scorecard? How you respond to “IT is always expensive” perception? Have you thought of challenges related to quantifying value your consumers get of IT services? Are you challenged to view IT costs by services you deliver? Or even budgeting and forecasting by IT services? Can you tell on the spot what your unit cost of a service is? What about demand driven IT? Do you feel that you are always over capacity with low utilization of services? What about leveraging marketing power to promote your IT services? How you can commoditize and brand your IT services? And many other questions and thoughts that keep CIOs awake at night.

(I can hear you thinking)

We have been hearing about “transformation” and “running IT like a business” quite frequently nowadays. As a matter of fact, these are becoming overused terms without real meaning of what they actually imply. Imagine that you are the CEO of a new wood furniture manufacturing business. Obviously, the main functions that you could initially think about are Product Management (who turns logs into useful products), Sales and Marketing (who promotes and sells to consumers), and Finance (who manages the financial aspect of the organization). The question is: why can’t we apply the same discipline to IT organizations? Similar to Product Management, IT organizations deliver services, and therefore we have Service Management and Service Owners/Managers. We are only missing two things here to run IT like a Business: a strong service-based financial operating model and the Services Sales/Marketing sense to help promote and consume IT services in the best valuable manner to consumers.

This is what the ITBMO brings to the table: a stronger partnership between IT, Business, and Finance to accelerate transforming your organization into a business-oriented, service-based, and value-focused one. Initially, you can think of the ITBMO as a virtual group or committee that has champions from various IT/Business functions. This virtual team paints the IT business vision and defines its mission on how to run IT like a business to deliver more value to business in the most economical way.

IT Business Management Office (ITBMO)

Figure : IT Business Management Office (ITBMO)

As shown in figure 1, the ITBMO supports 6 functions/towers to ensure stronger partnership throughout the IT service and project management lifecycle. These are:

  • Service Management Office (SMO): the entity (or any similar) within an organization responsible for the delivery and management of IT services. This includes the pure ITSM process management and ownership and delivery along with the ongoing management of IT services.
  • Project Management Office (PMO): the entity responsible for project management and governance
  • IT Finance: the function that takes care of the financial aspect of IT, which could be part of IT or Finance. This typically includes IT budgeting, accounting, pricing and cost optimization.
  • Services Sales & Marketing: a new (or maybe existing) function that will be improved and strengthened as part of the ITBMO establishment.
  • Business/IT Alignment: any existing functionality (such as Customer Relationship Managers or Account Managers) that ensures ongoing alignment between IT and Business.
  • Governance, Risk, and Compliance (GRC): the function (or multiple functions) responsible for organizational change, developing IT policy and governance strategy, IT risk evaluation and mitigation and compliance.

A champion from each function (could be multiple champions based on the organization scale and size) contributes to the core operations of the ITBMO to achieve the value-focused vision. The ITBMO runs in consultative and supporting mode, but depending on the IT organization’s authority, decision making process and power, and delegation factors, the ITBMO could be an authoritative entity within the organization.

Standing Up an ITBMO

Figure 2: Standing Up an ITBMO

Figure 2 shows the six steps required to standup a successful ITBMO within your organization:

  1. Develop Vision/Mission: thinking of why you need an ITBMO in the first place is your first step. What is the challenge you are trying to overcome or opportunity you want to introduce? Thinking collectively in a short/long term vision and drafting a mission statement of what this ITBMO actually does are your foundational steps towards a value-focused organization.
  2. Build and Position the Organizational Structure: figure out what roles are needed and who needs to be onboard and whether this is a virtual team of representatives or dedicated and how it fits the organizational structure and reporting lines
  3. Develop Process Interactions: fully understand your existing processes interactions within the functions that will be supported by the ITBMO, and figure out where you want the ITBMO to help, support, and interject to accelerate value realization
  4. Develop RACI Chart: translate your discovered process interactions and help areas expected into a roles and responsibilities chart (i.e. RACI). This will expose the areas of improvement and will help build a short and long term improvement roadmap across all supported functions to achieve the desired vision.
  5. Establish Value Measures and KPIs: quantifying IT value is one of the challenging tasks IT management confronts. This step defines a very high level value measurement framework or methodology along with the success factors and measures that a CIO or CFO can judge the success of ITBMO thru. VMware vRealize Business is the technology that will be used as a platform to define those value measures and KPIs and help making informed decisions.
  6. Build ITBMO Ongoing Operations: build your ITBMO ongoing operations guide by identifying which RACI responsibilities will be performed

So, you might now be thinking about the value an ITBMO can bring into your organization and how you could best leverage such a powerful business unity:

  • Establish business horizon within your IT and implement a model to help run IT like a business
  • Ensure tighter partnership between IT, business, and finance. This partnership is key to IT success like any other business.
  • Enable your organization explore more improvement opportunities and build a maturity improvement roadmap to run IT like a business
  • Help accelerate your transformation journey not just to a trusted service provider, but to a strategic business partner
  • Create new virtual business roles within your organization and help accelerate this transformation journey
  • Help your IT organization make better and strategic use of VMware vRealize Business to drive the cost optimization and value realization strategy and goals
  • Empower your IT to deliver on the desired quality, at the right cost by creating tighter alignment and accountability between IT, Business, and Finance
  • Elevate and strategize your IT conversations with service consumers, stakeholders, and executives to support IT and business transformation journeys

And if you’re heading to VMworld, don’t miss this session (OPT 5075) on Tuesday 9/1 at 5:30pm!

6 Steps to Establish Your IT Business Management Office (ITBMO) with VMware vRealize Business

VMworld 2015While many smart IT organizations have started their transformation journey to service-oriented and consumer-centric providers, there are still some key gaps that need to be addressed to ensure the effectiveness and efficiency of this transformation and therefore to yield the expected value. These gaps are related to the IT financial operating model and how modernized it is to cope with technology & cloud evolution along with the business speed. The IT Business Management Office (ITBMO) is revolutionizing the way IT leaders demonstrate business value to the enterprise. The ITBMO could be a virtual committee to ensure stronger partnership between IT, Business and Finance together to drive an organization towards faster value realization and maturation. Khalid Hakim, global IT operations, financial and business management architect, and Jason Nienaber, IT Business Management Director at VMware will shed light on this new business practice using VMware vRealize Business to move your IT organization to the next level in maturity and position it as a strategic partner to your business consumers and line of businesses.

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Khalid Hakim is an operations architect with the VMware Operations Transformation global practice. You can follow him on Twitter @KhalidHakim47.