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Your cloud or virtualization strategy demands a new approach to your IT books


Public cloud, private cloud and virtualization demand that VPs of Operations and their teams be able to do something brand new. No longer is it acceptable to have costs locked up in the pieces and parts of technology cost centers such as networking, storage and so on. Instead (as I recently wrote in my post “Allocating IT costs so the business gets IT!”) infrastructure, maintenance and people costs need to be brought together into an end-to-end IT service cost. This is pivotal to making strategic choices between internal and external delivery options, so that the overall cost of running the business of IT can be reduced.


Allocation makes the cost of IT services transparent

The important thing to get here is that costs—maybe for the first time—need to be reported in a manner that creates transparency into what IT Ops or Shared Services are doing well. When you allocate costs to services it becomes apparent where IT is world class and where IT is not—something strongly suggested in ITIL Version 3.0. To do this, all direct or indirect costs need to be funneled up into IT services.


So how does this work? IT organizations need to allocate together the end-to-end costs for network, telephony, servers and storage. This involves for most IT organizations collecting for the first time all of the costs that go into IT services. What are these? Let’s use an example of Linux servers.  Here, there are equipment purchases for Linux servers, the maintenance costs for Linux servers, the labor costs for the team that works on Linux and finally the costs of all upgrade programs and projects for Linux. Optional here is to, also, add a prorated portion of the network cost to the cost of Linux servers. When all of these costs are put together and totaled—an important thing to do—you have the cost of the IT Linux server service. And when you divide this number by the number of servers in your CMBD or Asset Management System, you can compare your costs against external service providers like Amazon or Microsoft. With this number, you can develop a business-based strategy for internal versus external service providers in all of the above categories.


Allocating IT service costs to business departments

Once IT service costs have been determined, you then need to allocate them to the applications and business groups that use and consume them. Remember the purpose of all of these IT assets is to support business groups and the applications they use. This means that we need to allocate IT services to the business groups and applications that consume them. In terms of how this allocation should take place, there are multiple ways to do this. It can be on a fixed percentage basis, a user count basis, an asset use basis, or virtualized asset basis. The last is probably the most fair as servers and storage in particular become pooled and it becomes harder to track their minute-by-minute utilization. In this manner, the total cost of an IT service is divided by the number of virtualized servers—something that is contained in a CMBD or Asset Management System.  And this creates an IT service costs per virtualized server. This cost (or price if there is a margin) is then multiplied by the number of virtualized server that each application uses.


So there you have it. You know why it is important for VP of Ops and organizations to book their costs by IT or infrastructure services. You know how you get to a cost of IT service. And finally, you know how you relate these costs to the business users and application consumers of IT.



Related links:

Blog post:

Allocating IT costs so the business gets IT

Blog post: 3 ways IT leaders can strengthen compliance and control

Blog post: COBIT 5 scorecard measures the quality of IT’s financial performance


Solution page:  IT Performance Management

Solution page: IT Financial Management

Twitter: @MylesSuer

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About the Author


Mr. Suer is a senior manager for IT Performance Management. Prior to this role, Mr. Suer headed IT Performance Management Analytics Product Management including IT Financial Management and Executive Scorecard.


Myles, Another good post in this thread that highlights the criticality of computing and allocating costs of IT services. The need to do this is accentuated by the cloud deployments.  Kind of makes one wonder if the CIO of today is really ready to answer the ROI question on Cloud Computing?


Connect with Nadhan on: Twitter, Facebook, Linkedin


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