Know your costs, not your budgets

For many IT organizations, understanding their cost to perform any particular service remains an unknown.

This is because their fundamental unit to think about costs is the budget for a department, not the unit cost of doing something.

As a result, even if the enterprise wants to manage costs intelligently, targeting only certain areas deemed less essential to continued success, and even if the IT organization as a whole wants to do the same for its services, the work to establish the unit costs involved has not been done.

That this is still going on — activity-based costing as a way of understanding how to target savings drives, or to treat budgeting issues as variable rather than fixed costs (so that demand would drive spending needs rather than historical patterns) was first put forward in the early 1990s — boggles the mind.

Still, most outsourcing agreements spend several years arguing over costing — and in most cases outsourcers, too, are unable to produce simple service catalogues for prospects that lay out unit costs for various services (activities).

Bad practice across the industry does not excuse anyone from getting on with things.

Managers simply cannot target areas for improvement effectively without knowing basic data such as the unit cost to perform a regular service.

It is time, therefore, to begin to sort this out.

Where to Begin: the starting point needs to be with services that are directly client-facing.

One organization I have talked with recently is wondering whether or not they should “exit” the cell-phone procurement business as they currently perform it. Should they simply set prices for various models? Should they ask their preferred carrier — the one they’ve negotiated preferential rates with — to operate a mini-store “in house” on their behalf, similar to the kiosks in shopping malls?

Without knowing what it costs them to deliver a phone to an employee today, they have no means of knowing whether there is even a problem here, much less which option might allow them to make savings in this area.

The reason client-facing services like this should come first is that the whole question of chargeback (or budget centre transfers) does not come into the picture.

Almost by definition, internal provisioning of this nature ought to be equal to (at worst) or cheaper than what the consumer can obtain.

Many areas of IT service don’t lend themselves to a simple head-to-head comparison: consulting, for instance, charges different amounts for different consultants based on the expertise and information they individually bring to a project (unlike internal staff, who are often given a “flat rate” that treats them as interchangeable parts — which they’re not).

Many infrastructure services, as well, are carried out “behind the curtain”, so to speak, and although these need to be costed the information will remain internal to IT.

Best to begin where you can ask for feedback (and demonstrate that you’ve made changes that make fiscal sense).

Defining the service clearly, then, is the first challenge.

It needs to be thought of as a “product”: you are selling this, and it is replicable. (Your spending is therefore purely a function of the demand for this “product.)

Looking ahead to the various business process sourcing options, including software-as-a-service, you want to get to the next step: the cost to perform a business service. How much per invoice, per payment, per activity?

Only then will you know which is in your organization’s financial interest.


About passionateobserver

I am a passionate observer of our society, the economy, and politics. Mostly I don't like much of what I see, so I write as a concerned citizen. To the fray, I bring a background in the philosophy of history, a lifetime's reading, a work history in information technology management, consulting and education.
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