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Allocating IT costs so the business gets IT! The keys to IT financial management

MylesS ‎09-30-2013 11:10 AM - edited ‎09-09-2015 03:07 PM

Last week in my post “Driving transparency for IT financial management — are we all speaking the same language?” I discussed the importance of relating IT costs to a business service, business process or business capability level. For IT leaders, this involves changing the way they view IT. They need to shift from solely thinking about the things IT does (the how) to thinking about IT enables (the what).


Richard Hunter and George Westerman said in their book, “Real Business of IT: How CIOs Create and Communicate Value,” that IT is like an exercise bike. The value proposition of the exercise bike is not in the pedals, handlebars or the other components; it is in the ability to lose weight and get in shape. The challenge for all IT organizations is to help their business understand where the money spent on IT is going. At the same time, IT has to act more like a businessperson when it comes to discussions regarding spending priorities and control. But how do you get IT leaders to make this change when IT collects its costs by cost center? The simple answer is by utilizing allocation.


Allocation needs to be done in a transparent fashion


The important thing to understand here is that IT needs to allocate costs in a manner that creates transparency at every stage of the process. This transparency helps consumers understand IT costs. This way they have a better understanding of where their services come from—be it a virtual server, sales force automation application or service. So, what are stages to doing this and why do they matter? Well, everything that IT does effectively is a service, process or capability for the business. This means that all costs—direct or indirect—need to be funneled up to one or multiple of these layers.


How does this work? As Julie Andrews said in “The Sound of Music,” let’s start at the very beginning. IT organizations are clearly more than a random compilation of machinery, equipment, people and money. This is a case of where the sum is greater than the parts. Only by arranging these parts is it possible to produce something that customers will understand and pay for.  


The first step here is to coordinate the things that make services or projects deliverable in the first place—network, telephony, servers and storage. This stage of allocation involves capturing all of these expenses into supporting activities. This is done by grouping the IT costs that go into IT services. What are these? Using the example of the network, these expenses may include:


  • Equipment purchases (WAN, LAN, and the backbone components, as well as the maintenance costs for all of this equipment)
  • Labor costs for the teams that works on the network
  • Costs of all upgrade programs and projects.


When these costs are totaled up—a very important thing to do—you have the cost of the IT network service. By the way, getting to these numbers is increasingly important in a world of cloud and internal and external service providers, because internal organizations need the ability to compare inside services to outside providers.


Higher-level allocation drives customer understanding


Once IT services have been assessed, we need to allocate these costs to the various applications that IT runs. Remember, the purpose of all of this IT stuff is to deliver applications that solve problems.  A network has no purpose by itself. So we need to allocate IT services costs to business applications. This type of allocation is what the accountants call an “allocation of an indirect cost”. The direct costs of running an application also need to be added to this indirect cost. This includes the software, dedicated hardware as well as maintenance and labor costs.


Once application costs are collected, they are in turn allocated to business services. Services—in today’s environment—represent a canister of present state and future state applications. So we allocate application costs to services and then add these expenses to the cost of supporting programs and/or projects related to these applications. This results in the total service cost which can be compared to outside providers.


The final stage of allocation is to customers


Once you have service costing, the final element of allocation is allocating costs to customers. This can involve two steps:


  • The first step is allocating service costs to business processes and/or business capabilities. These are things which most business leaders understand and can enable business leaders to help IT leadership prioritize against.
  • Second, IT needs to allocate these costs to business customers. Taking all of these allocation steps allows the business to know what it’s paying for in a language of the things it actually consumes from IT.




As we have said throughout this post, it is important to have the ability to present the IT budget not simply as a list of components or pieces parts but as the things the business actually consumes. With this information IT can then ask the business questions in the budget review. Is this service still needed? This project is delayed how will it impact the business? As in one’s personal life, show me the checkbook and I will show you the priorities. And here I will show whether IT priorities correspond with business priorities.


Related links:

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.

Dan Abell
on ‎10-29-2013 01:57 PM

Likewise IT can understand the true cost as well.  In some cases engineered solutions are only technical solutions and no one in IT really understands, or cares, about the cost of delivery.   How many times are assets over specified with no follow up to understand what was really needed - you know a "return on assets" value?  So follow up after implementation is equally important to ensure effective deployment of these resources.

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