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How to Create a More Accurate, Useful, and Equitable Service Costing Process

By Khalid Hakim

In my last post, I described the pressing need for a more effective IT service costing process (as a solution to the pressing need for tighter business/IT alignment!). The question now… is how.

How can companies create a service costing process that is fast, accurate, transparent, granular, fair, and consistent—without introducing yet another time-consuming and expensive project to the IT docket?

To answer this question, I’ll use a real-world example—a company that has recently been through the process and achieved excellent results.  I won’t name the company but I can assure you it’s a real enterprise, and the results were also quite real. I’ll refer to it as “The Company.”

In the past, The Company charged for IT services by simply allocating the total IT costs among service consumers based on the number of desktops and laptops they used. This “lump sum” cost allocation of course led to the perception that “IT is always expensive.” The Company knew it needed to move to a more service-oriented, customer-centric model.

Our team provided guidance in setting up a better service costing process. The implementation began with three key steps:

1. Create a service-based cost model diagram.
A cost diagram depicts the flow of IT costs from the general ledger or cost sources all the way to the services being provisioned—in such a way that IT can present consumers with a statement showing all service costs.

2. Develop a service-based cost allocation strategy.
The Company already had a cost allocation process in place, but it did not deal with service-to-service cost allocation. So The Company’s lump-sum allocation did not demonstrate any IT value but only the cost of IT when running the business. That’s why a service-to-service costing method was needed that would account for everything:

  • Servers and their related hardware
  • Network and security allocation to servers
  • Data center, storage and data center facilities costs
  • Software and enterprise license agreements
  • Support and operations contracts
  • IT project costs
  • Labor costs
  • IT overhead

This way The Company was able to fully load IT costs into services being delivered and transfer these costs to the business.

3. Develop a service-based cost classification strategy.
The Company classified all IT service costs into the following categories:

  • In/Out Service Costs: All direct service-related costs should be part of a service cost, while non-related service costs should be part of accounting period costs.
  • Fixed vs. Variable costs. Variable costs vary based on usage or time (i.e. data center utility bills, support tickets, or service consumption). Fixed costs are fixed regardless of service or resource usage (i.e.  software license costs, hardware purchases and support contracts).
  • Direct vs. Indirect. A direct cost is directly related to a service and can be easily traced. Indirect costs are indirectly related to a service and are typically spread over a number of services.
  • CapEx vs. OpEx. Capital expenditures are major expenses incurred whose costs have to be depreciated (split over) over the useful life of an IT asset, while operational expenditures are incurred periodically.

After the strategic IT/business processes were carried out, service-specific tasks began. These included defining and charting individual services, developing service-specific cost packages, and tracking and managing service costs over time.

Next it was time to consider the “people” aspects of service costing. Technology cannot provide a solution on its own; it must be developed and deployed in conjunction with stakeholders.

Along the same lines, handling IT financial management (ITFM) activities is not a one-man show. At The Company, the following roles were defined, along with specific responsibilities:

  • Financial Controller
  • IT Financial Manager
  • Service Manager
  • IT Manager
  • CIO
  • Customer Relationship Manager
  • VP of Infrastructure Services

Developing a roles/responsibilities chart (known as a RACI) then provided a concise and easy way to track who does what along with the level of contribution and accountability.

Next came identifying the right technologies to use in the service costing process. In this case The Company made a strategic investment with VMware and deployed the VMware IT Business Management Suite. This is the technology that will help them gain cost transparency, align with the business, enable the CIO’s transformation agenda, and control and optimize the IT budget and costs.

In addition, The Company has implemented basic CIO and Service Manager dashboards to provide insight into the financial performance of all managed services. The dashboards define the visual layout of the user experience. Each dashboard is composed of frames that display customized information designed for the intended user. The dashboards enable the CIO, IT Financial Manager, and Service Managers to gain access to cost information and make data-driven decisions.

SCP white paper coverToday The Company’s IT department is well on its way to being more business-oriented and service-oriented through better service costing. The Company can now trace IT costs from general ledger all the way to all business units consuming IT services. The new costing model also lays out the key roles and responsibilities, and VMware technology helps provide cost automation, transparency, and service-based cost modeling.

I’d encourage you to get full details about the service costing process outlined in this blog post by reading my white paper, Real IT Transformation Requires a Real IT Service Costing Process.”

Until next time—may all of your IT service costs be allocated with fine granularity and full transparency!
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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 #OPT1572!

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.

 

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.
——-
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.