Tag Archives: SCP

Building Service-based Cost Models to Accelerate Your IT Transformation

By Khalid Hakim

“Why is this so expensive?”

As IT moves towards a service-based model, this is the refrain that IT financial managers often hear. It’s a difficult question to answer if you don’t have the data and structure that you need to clearly and accurately defend the numbers. Fighting this perception, and building trust with the line of business, requires a change in how IT approaches cost management that will match the new IT-as-a-service format.

The first and most important step in building service-based cost models is defining what exactly a service is, and what it is not. For example, the onboarding process: is this a service, a process, or an application? Drawing the lines of what service means within your organization, and making it consistent and scalable, will allow you to calculate unit costs. Businesses are already doing cost management by department, by product, by technology, but what about the base costs, such as labor, facilities, or technology within a software-defined data center? Your final service cost should include all these components in a transparent way, so that other parts of the business can understand what exactly they are getting for their money.

Building these base costs into your service cost requires an in-depth look into how service-to-service allocation will work. For example, how do you allocate the cost of the network, which is delivered to desktops, client environments, wireless, VPN, and data centers? Before you can start to bring in a tool to automate costing out your services, map out how each service affects another, and define units and cost points for them. While it’s often tempting to jump straight into service pricing and consider yourself done once it’s complete, it’s important to start with a well defined service catalog, including costs for each service, then to continue to manage and optimize once the pricing has been implemented. Service costing helps to classify your costs, to understand what is fixed, what is variable, direct, indirect, and so forth.

So we’ve allocated the shared cost (indirect cost in accounting language) of services across the catalog. Now it’s time to bring in the service managers—the people who really understand what is being delivered. Just as a manufacturing company would expect a product manager to understand their product end to end, service managers should understand their entire service holistically. Once you’ve built a costing process, the service manager should be able to apply that process to their service.

In the past, service managers have really only been required to understand the technology involved. Bringing them into this process may require them to understand new elements of their service, such as how to sell the service, what it costs, and how to market it. It helps to map out the service in a visual way, which helps the service managers understand their own service better, and also identifies the points at which new costs should be built into the pricing model. Once you understand the service itself, then decide how you want to package it, the SLAs around it, and what the cost of a single unit will be. When relevant, create pre-defined packages that customers will be able to choose from.

SCP white paper coverOnce the costing has been implemented, you can circle back and use the data you’re gathering to help optimize the costs. This is where automation can offer a lot of value. VMware Realize Business (formerly IT Business Management Suite) helps you align IT spending with business priorities by getting full transparency of infrastructure and application cost and service quality. At a high level, it helps you build “what if” cost models, which automatically identify potential areas for cost reduction through virtualization or consolidation. The dashboard view offers the transparency needed to quickly understand cost by service and to be able to justify your costs across the business.

Service-based cost models are a major component of full IT transformation, which requires more than just new technology. You need an integrated approach that includes modernization of people, process, and technology. In this short video below, I share some basic steps that you need to jumpstart your business acumen and deliver your IT services like a business.

For more in-depth guidance, you can also access my white paper: Real IT Transformation Requires a Real IT Service Costing Process, as a resource on your journey to IT as a service.

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

 

The Missing Link of IT: An Effective Service Costing Process

By Khalid Hakim

For years now, there has been much discussion about the urgent need for tighter alignment between business and IT. Why are we still talking about the “need for” alignment and not the “results of” better alignment? Because all too often, IT cannot answer one of the key questions business leaders ask: “What exactly does this service cost?”

In many cases IT does not have an adequate service costing process, which means it does not have a fast, accurate, consistent, fair way to provide cost information about IT services to constituents. And the lack of an effective service costing process is costing both IT and the business—big time.

Cost transparency is important not only because IT service users want to know what they’re paying for, but also because it provides an opportunity for IT to quantify its value to the business.

If IT can provide accurate cost information, both business and IT leaders can make better decisions about IT investments, outsourcing, cost cutting, business strategy, and competitive differentiation.

We’ve all heard the mantra “Minimize IT costs while maximizing business value,” or its short form: “Do more with less.” It’s a core principle of IT business management (ITBM). But without an accurate, transparent service costing process, how can IT leaders truly deliver IT as a service (ITaaS) and run IT like a business?

Take a closer look at your existing service costing process and ask yourself a few tough questions:

  • Is it accurate? Does it take into account all of the CapEx and OpEx elements of delivering an IT service?
  • Is it equitable? Does it charge the right constituents the right amounts for IT services, based on their actual consumption—or does it simply charge a lump sum based on voodoo economics?
  • Is it transparent? Can constituents get an accurate breakdown of what’s included in the final price tag and what isn’t?
  • Is it improving IT investment planning? Your service costing process should enable business and IT leaders to create more finely honed investment strategies that cut costs while creating new competitive advantages. Is it?

If you can look in the mirror and answer “yes” to all those questions, congratulations—you’re a member of a small minority of enterprise IT departments with an effective service costing process. If not, ask yourself the next logical question: How can you develop a better service costing process?

I’ll address that question in my next blog post. So stay tuned.
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Khalid Hakim is an operations architect with the VMware Operations Transformation global practice. You can follow him on Twitter @KhalidHakim47.

VMworld-graphicAnd if you’re heading to VMworld, don’t miss Khalid’s session!

Accelerate Your IT Transformation — How to Build Service-based Cost Models with VMware IT Business Management (ITBM)
A recent VMware survey showed 75% of IT decision makers list the number one challenge in IT financial management as lack of understanding of the true cost of IT services. ITBM experts and VMware Operations Transformation Architects Khalid Hakim and Gary Roos shed light on this alarming figure, and give practical advice for obtaining in-depth knowledge of the cost of IT services so you can provide cost transparency back to the business.

When you visit the VMworld 2014 Schedule Builder, be sure to check out the SDDC > Operations Transformation track for these and other sessions to help you focus on all the aspects of IT transformation.

Provide Transparency with an ITBM Service Costing Process

By Khalid Hakim

Last week I wrote about the growing need for IT to provide cost transparency to the business, especially to support its transition to a service provider or broker model. I also outlined some of the problems caused by opaque, decentralized costing strategies.

At VMware, we rely on an IT Business Management (ITBM) Service Costing Process (SCP) to help customers run IT like a business. Behind the acronyms lies a powerful tool that allows IT to validate its expenditures and solidify its role as a business leader. Here are four areas where our ITBM SCP solution helps address the challenges I outlined last week.

1. Service-based cost models
The ITBM SCP helps your organization establish a well-defined, repeatable, and consistent service-costing process with clear roles and responsibilities. This includes engaging the IT and finance teams to create and possibly mature your service-based cost model to encapsulate both technical and business services. Once developed, a service-based cost allocation strategy is signed off on by all involved departments to ensure standardization across the IT organization.

Using the SCP methodology also helps standardize how costs should be classified based on IT Financial Management (ITFM) and ITBM management principles, along with finance department policies. By implementing a full-service cost model, IT helps explain the cost of its services and deliverables, eliminates random cost allocation, and ensures more effective cost optimization efforts.

2. True cost transparency
An ITBM SCP approach encourages service-based cost models to be built in a collaborative way that provides IT with internal cost transparency which can be shared externally (with your executive and line of business stakeholders, and customers). A series of workshops help cost an end-to-end service using a number of use cases and alternative scenarios to come up with a service-specific cost structure that best fits your organization and business needs. This in turn helps avoid any over- or under-costed services. The SCP empowers service managers/owners to defend their numbers more confidently and helps shift IT’s image from “always expensive” to “always valuable.”

3. Value-driven approach
Our SCP methodology is supported by an Agile approach, which provides coverage to all IT services, along with more reliable data sources and processes. The iterative, phased approach delivers quick wins, ensuring that value is immediately recognized by all your stakeholders. This in turn helps you rebrand IT as a value creator rather than a cost center.

4. Improved ITBM maturity
The SCP solution targets service managers and owners (in addition to IT financial managers) via a series of knowledge transfers, educational workshops, and discussions to provide the background needed to manage IT as a business and optimize ITFM processes. It also raises the awareness of the finance team, since their view is typically limited to non-service management accounting. All together this helps elevate the investment planning process to a more service-oriented approach that drives higher IT and business value. Moreover, it helps define the success metrics required to sustain the SCP process and ensure strategy continuity.

In all these ways, the ITBM Service Costing Process can help your IT organization understand its costs, increase efficiency, identify areas of improvement, and provide the transparency necessary to help the business continue to see IT as a value creator.

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

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.