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Costs: The Essential Currency of Business Service Management
by Bob Multhaup

IT Costs – “Uh, well, hmm, It depends on what the meaning of the word 'Cost' is”

I would like to talk about the meaning of the word ‘cost’ in terms of IT, to help answer the simple question ‘what does IT cost at your company? Because cost, even in accounting terms, is quite nebulous and has attained a multitude of ‘new’ definitions in the battles of cost cutting. But more importantly, cost is the essential currency of Business Service Management, especially between IT and the senior management customers who are paying for IT. And BSM enables IT to express its costs as a true business professional and not as a naive technician. So let’s look at redefining cost in BSM terms.

Now I would have to admit that I am not innocent of trying to dance around the questions of what my IT costs were, using various diversionary tactics, deflecting blame to any other person in the room, or entering into a Clintonesque soliloquy that quiets the room very nicely. My most minimalistic definition was ‘all the costs remaining in the IT budget after having pushed as much as possible into the highly invisible user community budgets’. But I realize now what the disconnect was, in that there is no easy answer to the question, ‘what are your IT costs’ because the definition of IT is not that clear and the definition IT costs is also not that clear.

Normally (IT operates in another time dimension so normally doesn’t apply here) the term ‘cost’ is associated with something that you are buying. For instance, a haggard Dad trying to replace a broken washing machine might say ‘What does that washing machine cost?’ This appears to be a simple economic inquiry, and it is. The person is associating something that he wants (well not really wants, rather is highly motivated to avoid his wife’s wrath) with how much monetary tender he is willing to cough up to avoid going to the Laundromat to wash the family clothes (which is much more than the cost of a washing machine). But it is very clear that ‘cost’ never just stands alone, it is always associated with something that has a value (in this case a well-known brand washing machine that is guaranteed to break right after the warranty expires). In other words cost is always used with a clear reference to something that you would buy, and the underlying insinuation of the term cost is ‘is it worth it?’. Is the cost of something worth the value received (in the above sentence we will revert to the traditional definition of the word ‘is’ for the sake of sanity). 

Now when asked, ‘what does IT cost at your company?’, the correct answer is actually ‘that depends on what the meaning of ‘costs’ is’ (thanks, Bill Clinton). The question implies that the company had bought something called IT just like the washing machine in the above paragraph. The problem is that a washing machine does something very specific for a cost, but IT by itself doesn’t do anything specific (this was not an intentional dig).  IT is actually a collection of technologies that gets inserted into various business processes to make them more efficient and or effective. So it is impossible to talk about IT costs without associating the IT technology with the business process that it is supporting. And the best way to express IT in terms of what it actually does, is to refer to the IT service that supports a specific business process. For instance a good question might be, ‘What do you pay to have a PC or laptop for each employee’s office automation needs?’ You see now you are actually buying something at a cost. And then this leads to the next really important question, are you happy with the PC Support Service, or are you getting your money’s worth?. So now we’ve intellectually elevated the cost of IT to the same level of buying a washing machine, (only IT doesn’t come with a well-known brand’s limited warranty).

OK, let’s get a little more serious, so you really can’t talk about IT Cost in general, because it’s meaningless. What can be discussed is the cost of an IT Service. And the sum of all Services is called the Cost of the Service Portfolio. And each IT Service needs to be broken down into a set of cost types that are significantly differentiated and need to be segregated. If you look at the above Desktop Service, there is a clear direct IT cost that is required to deliver the technology, there is a cost to support all the problems with the Service, and there is a cost on the customer side to support the service. Also to determine the Total Cost of Ownership of a service where a Business Service is actually using other IT Technical Services to deliver the solution (this is true of most major applications that require servers, storage, monitoring, etc.) one must determine how much of these other Technical Service’s indirect costs are being used by the Business Service. So, below is a better breakdown of each of these cost types and how they can be used to better define and measure IT Service Costs.

Cost to Deliver the Service from the IT Function

Cost to deliver an IT Service is basically the traditional definition of an IT cost. However the traditional definition usually refers to the IT functional department as defined in the Financial and Organizational company structure that supports an IT technology, such as the Hosting group, Network Support, Storage Management, Application Development etc.  Costs are accumulated in these Cost Centers and Accounts, but it is impossible to use this information to understand the cost dynamics, what Service costs are increasing or decreasing, and basically what the costs are for. So these costs need to be translated to the IT Services that they are supporting (this is a bigger subject than can be discussed in this article, but many companies do now have a defined set of Services that they deliver).  Once Services are defined, the cost to deliver the service includes the direct and indirect hardware and software costs, people costs supporting the service, and any other costs that are required to deliver the Service.  Below is an example of a Technical Service (Hosting Services) broken down to Cost Components and then to the resources and assets required to deliver the Service.

Direct Service Delivery Costs-Technical Service

1

These costs only include the cost to maintain and support the basic service, and do not include any new project costs. This is a baseline cost and is good benchmark because it refers to the cost to just ‘run the service’, excluding new investments, so it can be compared to similar market outsourcing offerings. In addition a proportion of each Technical Services should be assigned to the Business Services that they support so that the in-direct costs of the service can be established. Below one can see the VMWare Hosting costs further allocated to the Finance Business Service.

Indirect Service Delivery Costs-Business Service

2

Cost of Service Defects

In addition to the direct IT costs of a Service, it is important to capture the cost to report, service and resolve incidents around the Service. Any outsourced service would probably include this cost. This is usually done by first determining the number and types of incidents that have been reported for the Service (hopefully your company has a Helpdesk Tracking System with this data in it), and from there one either has some real data on the time it took to resolve the incidents, or these costs must be extrapolated based upon some assumptions. The basic data might look like this:

  1. Number of Incidents for Finance = 400 per year
  2. Number of simple Helpdesk Level 0 incidents resolved = 300
  3. Number of level 2 incidents = 100
  4. Average time to resolve a level 0 incident = 30 minutes * $40 per hr.
  5. Average time to resolve a level 1 or 2 incidents = 480 minutes * $100 per hr.

In addition there is .5 FTE required to support the Service from the User department at $100,000 per yr., another .5 FTE direct IT FTE to develop enhancements, same for new projects. Both capital investment and the lost productivity of the users being negatively impacted by incidents and downtime are not included here but could be to be complete.

Total Cost Business Service-Finance

3

So the following answer could be given to answer the question ‘What does it cost to support the Finance Systems at your company?’

‘All the Finance applications are bundled into an IT Service called Finance/Controlling/leasing which costs about $383,000 just to maintain the existing applications and service levels. Last year we spent about $50,000 on enhancements and $60,000 on project work, in all costing about $483,000 per year. About 78% of those costs are direct IT Department costs, 12% are user costs, and 10% for Incident Management’. Now this same cost analysis needs to be applied to all services and the same type of answer can be given for the entire Service Portfolio. But this becomes a pretty good answer to the question what are your IT costs.  This also allows the Service manager to calculate the unit based costs per Service such as the cost per seat ($9,858 per seat for each of the 50 Finance users), plus each user would also consume other Services such as Desktop Services, Data Communications, Telecommunications, etc.

So, to summarize, the old way of defining IT costs as a general sum of all IT Cost Centers has to be considered a pretty meaningless number. And the new definition has to be expressed in Business Service Management terms as the sum of the IT Service Portfolio costs, broken down by maintenance, enhancement and new projects, and by direct and indirect costs from the resource and assets pools required to support the service, such as users and helpdesks. Now if this answer doesn’t work, you may have to go back to a more convoluted answer as Bill would do and clearly explain to everyone.

Bob Multhaup is President of IT Business Dimensions and architect of the ITin3D IT modeling tool which provides the information IT Management needs to ‘run IT as a Service Business’. Leveraging over 12 years as a CIO in the Life Sciences industry and 7 years working overseas in Europe, Multhaup has designed this tool to consolidate and integrate a customer’s disparate data sources into a unified multi-dimensional model of IT Service Costs, Value, and Consumption based upon BSM and ITIL principles. Multhaup is partnered with Migration Technologies to provide cost modeling and Financial Management solutions for ITIL implementations. By working closely with his customers to quickly build and customize these service based management models, the results and benefits offer a high degree of customer satisfaction by enabling Service Portfolio Management, Service Budgeting, Strategic Planning, Service Performance Measurement, and IT Financial Management and Controlling. Multhaup has a degree from Brown University and an MBA in Finance along with other ITIL certifications.


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