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Establish a Service-Based Costing Model
Not knowing your costs is an expense you can’t afford.
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Contributors
- Robert Mischianti, Vice President Product Development, Nicus Software
- Paul Lewis, Chief Technology Officer, Hitachi Data Systems
- Michael Davison, Converged Infrastructure Specialist, Hitachi Data Systems
- Jeff Yoder, Vice President, Strategic Partnerships, Global Marketing Strategies, ComSci by Upland
- Chris Pick, CMO, Apptio, and President, Technology Business Management Council
Your Challenge
- While IT departments provide valuable services to their organizations, it is frequently unclear how much these services cost. CIOs often find themselves in a position where they cannot articulate exactly how much it costs to deliver a given service in order to justify the service’s value.
Our Advice
Critical Insight
- IT capital and operational costs are captured in accounting ledgers using financial constructs that lend themselves well to financial reporting, but obscure the true cost to deliver each IT service.
- Translating accounting ledgers to IT service costs is a difficult process that may sometimes appear arbitrary.
- The data required for detailed service-based costing is often unavailable.
- Service-based costing is not for everyone. It requires clearly defined goals and commitment to be successful.
- You don’t have to be perfect to gain value from service-based costing. Imperfect analysis can still point you in the right direction for improvement.
- Nobody trusts a “black box.” Be transparent with results.
Impact and Result
- Use a method of determining the full cost of services that provides a reasonable level of accuracy without overburdening staff with excessive analysis and investigation.
- Optimize the balance between analytical effort and accuracy of service costing by understanding your service cost accuracy needs and matching them to an appropriate level of service-based costing capability.
- Develop the right level of service-based costing capability by applying the methods in this blueprint.
1. Make the case
Recognize the importance of service-based costing.
2. Assess service-based costing need and maturity
Use the Service Based Costing Maturity Model to recognize your current level of capability as well as where you need to be to meet the needs of your organization.
3. Establish a Level 1 service-based costing model
Use Level 1 to help you get results quickly without having to transform all of IT to a service-based delivery model.
4. Establish a Level 2 service-based costing model
Enhance your Level 1 capability by evolving from categories of services to individual services to reach a level of service cost accuracy sufficient for benchmarking against industry.
5. Establish a Level 3 service-based costing model
Once you are fully committed to service-based costing, it is time to bring in sophisticated software and skills to take your service-based costing to the next level.
6. Document and maintain the service-based costing model
Maintain the service-based costing model over time to reflect both changes in cost structures and in the nature of the business; follow a proper change management process and keep the documentation up to date.
7. Use service-based costing to drive business value
Show management how to drive value from service-based costing by enhancing business decision making, increasing service use accountability, and improving cost forecasting.
Guided Implementations
This guided implementation is a five call advisory process.
Call #1 - Assess maturity and need
Know where you are – and where you’re going: Use the Info-Tech Service-Based Costing Maturity Model to recognize your current level of capability and the needs of your organization.
Call #2 - Establish a Level 1 service-based costing model
Start off on the right foot: Service-based costing is complex and difficult; Level 1 will help you get results quickly, without transforming all of IT to a service-based delivery model.
Call #3 - Establish a Level 2 service-based costing model
Be fulsome: Enhance your Level 1 capability by evolving from categories of services to individual services and accounting for service-to-service consumption.
Call #4 - Establish a Level 3 service-based costing model
Get accurate and precise: By this point, you are fully committed to service-based costing and it is time to bring in sophisticated software and skills to take your service-based costing to the next level.
Call #5 - Use service-based costing to drive business value
Show management how to drive value from service-based costing: enhance business decision making, increase service use accountability, and improve cost forecasting.
Book Your Workshop
Onsite workshops offer an easy way to accelerate your project. If you are unable to do the project yourself, and a Guided Implementation isn't enough, we offer low-cost onsite delivery of our project workshops. We take you through every phase of your project and ensure that you have a roadmap in place to complete your project successfully.
Module 1: Make the Case
The Purpose
- Recognize the flaws in traditional costing methods.
- Define the opportunities service-based costing can afford.
- Explain the challenges of service-based costing.
Key Benefits Achieved
- Understanding of service-based costing.
- Knowing the benefits and risks of service-based costing.
Activities
Outputs
Define service-based costing.
- Set a common foundation for why service-based costing can help your organization.
Identify benefits and risks.
Discuss the state of IT cost transparency in your organization.
Module 2: Assess Maturity and Need
The Purpose
- Clarity regarding the Info-Tech Service-Based Costing Maturity Model and the capabilities required to achieve each level.
- Certainty regarding your current service-based costing capability.
- A decision regarding your target level of service-based costing maturity.
Key Benefits Achieved
- Current level of maturity identified.
- Target level of maturity identified.
- Metrics to track success selected.
- Defined metrics to track your progress.
Activities
Outputs
Identify target maturity.
- Gap analysis of current and target state to identify service-based costing process.
Identify current maturity level.
Being practical in deciding attainable benefits.
Module 3: Target Service Category and Service
The Purpose
- Determine the service and service category that service-based costing analysis should focus on.
- Ensure that the service category and service are clearly defined.
Key Benefits Achieved
- Targeted service category.
- Defined service.
Activities
Outputs
Identify service category.
- Targeted service category definition.
Define service category.
- Targeted service definition.
Identify service.
Define service.
Module 4: Develop an Allocation Methodology
The Purpose
- Develop an allocation methodology that fairly allocates general ledger line items to service categories.
- Develop an allocation methodology that fairly allocates general ledger line items to services.
- Document allocation methodology.
Key Benefits Achieved
- A fair allocation methodology.
- Identified cost drivers.
- A documented allocation methodology.
Activities
Outputs
Develop your allocation methodology.
- Cost model with allocation methodology defined.
Document your allocation methodology.
- Documentation template with allocation methodology documented.
Module 5: Determine Costs
The Purpose
- Determine your service-based costs at the service category and service levels.
- Ensure the cost model is able to meet your needs in terms of accuracy and ease of use.
Key Benefits Achieved
- Determined service category costs
- Determined service costs
- Cost model meets your needs.
Activities
Outputs
Identify service category costs.
- Breakdown of service category costs.
Identify service costs.
- Breakdown of service costs.
Ensure your cost model can meet your needs.
- Report summary to measure accuracy and ease-of-use of the cost model.
Module 6: Use Service-Based Costing to Drive Business Value
The Purpose
- Use service-based costing to establish business unit accountability.
- Use service-based costing to make better decisions.
- Use service-based costing for budgeting.
Key Benefits Achieved
- Business unit accountability established using service-based costing.
- Benchmarks obtained and validated.
- Business decision making using service-based costing.
- Best practices for budgeting with service-based costing.
Activities
Outputs
Use service-based costing for decision making
- “What-if” scenario modelled using the Service-Based Cost Model Tool.
