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An ITBM Service Costing Process is Key to IT Transformation

By Khalid Hakim

KHALID-cropAs more businesses recognize the integral role IT plays in the overall success of the enterprise, executive and business stakeholders have higher expectations of IT’s performance and its ability to prove its value. Providing cost transparency back to the business is key to meeting those expectations.

That is why today’s IT organization needs to have an in-depth understanding of the costs associated with delivering IT services, enabling each service manager/owner to defend his or her numbers from a service angle (not from an expense code or department/project budget) and hence improve the overall IT service value perception.

This highlights the need for a new management discipline that provides a framework to deliver IT as a service and manage the business of IT: IT Business Management (ITBM). Yet many IT leaders do not have the support, knowledge, or bandwidth needed to implement an effective ITBM practice, with its core focus on minimizing IT costs while maximizing business value.

When I’m working with customers, I use VMware’s ITBM Service Costing Process (SCP) to facilitate a modular service-based costing approach that offers ease in manageability and operability. In my next post I’ll dig into the details of how the SCP solution is used as well as the benefits and business value it addresses. But first, I want to clarify the far-reaching repercussions of failing to implement these processes.

Common challenges facing IT
The biggest problem for today’s IT organizations is not insufficient funds or financial management people skills, but rather IT planning, budgeting, costing, allocating, and pricing, all of which are based on by-department cost management.

Traditional IT costing methods don’t explicitly call out value-service based structures and bills. They are more focused on costs associated with technology component purchases, projects implemented, cost code totals, department costs, and customer allocations of these non-value-add cost elements.

These situations create a host of business issues for IT:

Failure to understand the costs of IT deliverables Not all service managers are able to understand their end-to-end service costs and defend their expenses due to the lack of true service views, including service catalogs and definitions, as well as service-based cost models.

  • Arbitrary cost cutting and budget shrinking decisions — Management often looks at expense lists from cost-codes or a totals view, not from a service-based view that enables top management to see a holistic path to savings.
  • Random cost allocation — IT’s cost allocation is typically based on policies and guidelines set by the finance management department that are usually technically driven and don’t reflect the full value of IT.
  • Overstated or understated service costs — IT service cost calculations may include superfluous cost elements or exclude key cost elements. This is all caused by lack of a well-defined service-based costing process standard across IT, which results in services that can’t be compared “apples-to-apples” with outside service providers.

The “IT is always expensive” perception — Service managers and owners can’t confidently defend their numbers, which results in a common perception that IT is expensive.

Lack of trust and value realization — Due to the lack of value-centric conversations and full service-based cost transparency, talks tend to focus on numbers instead of the true value delivered to the business. As long as services are not being managed as business, then customers will continue to question what their money is buying.

Data does not support making meaningful decisions — One of the biggest challenges IT faces without an ITBM SCP is unreliable and inaccurate financial data related to IT assets.

Poor budget processes or lack of budget clarity —The traditional IT budgeting process follows a limited approach that limits IT’s capabilities view and creates uncertainties and inefficiencies in day-to-day operations.  Running IT like a business requires budgets to be based on services demands, rather than expense codes.

Limited financial and business management background — Financial management is not stressed across the IT organization, instead seen as a specialized role important for ITFM managers only. Service managers and IT generally lack basic financial management background that could provide them important insights.

But there is good news for the IT organization. Check back, and I’ll share more details about the ITBM SCP solution and the four key areas in which it addresses these challenges.
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Khalid Hakim is an operations architect with the VMware Operations Transformation global practice. You can follow him on Twitter @KhalidHakim47.

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