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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.