Cost Modeling Best Practices for Practitioners
“I don’t have all the inputs.”
“How do I keep the model simple?” 3
“What can I expect once transparency is achieved?” 4
After this session, you’ll be able to: • Clearly articulate the value of cost modeling • Build and manage a cost model • Understand outputs and outcomes of cost modeling • Take your organization on a successful transparency journey Elevate IT. Ignite Possibility. 5
Defining Cost Modeling Elevate IT. Ignite Possibility. 6
Visibility Into Key Spend Viewpoints BUSINESS CAPABILITIES GL ACCOUNTS SERVICES CONSUMERS & APPLICATIONS • Consumers (100%) • Apps grouped and allocated • GL & AP Data • Compute, Servers, Storage, • Application or End User to business services AD, Desktops, Laptops, etc. • Cost Center / Account • Business Service Metrics Elevate IT. Ignite Possibility.
The Value of Cost Modeling • Aligns IT spend to business value • Enables the CIO to transition from defending the budget to gaining support for new initiatives • Elevates IT from a cost center to a business partner by developing trust • Provides several dimensions of TCO (service, consumer, application, business capability), with each dimension providing insights to key stakeholders • Empowers practitioners to fully analyze, communicate, and justify the cost of services they deliver to the overall organization Elevate IT. Ignite Possibility. 8
Building & Managing Cost Models 9
Key Capabilities • Create multi-dimensional views • Include budget, actuals, and forecast • Trace forward and backward Elevate IT. Ignite Possibility.
Key Challenges Iterate – Limit initial scope: define and • refine, address data gaps over time Limit Complexity • Service Catalog Size – Cost & measure • Avoid Precision Traps • “Directionally Correct” • Elevate IT. Ignite Possibility. 11
Tiered & Layered Model Elevate IT. Ignite Possibility. 12
The Tiered Model & Allocation Methodologies Challenge of external Governance market comparison Run IT like a business Service contract Challenge of choice IT pricing Operational Challenge of fairness service levels Flat rate tiered negotiated Challenge of accountability Service level objectives IT domain cost allocation Measured/ Subscription fee Direct cost resource usage High-level allocation – hybrid chargeback - showback 13
Cost Model: Budget, Actuals, Forecast Cost of Services (Forecast) Forecast Service Cost Budget Cost of Services (Budget) Model Actuals Cost of Services (Actuals) Elevate IT. Ignite Possibility. 14
Building & Managing Cost Models: Service Catalog Impact 15
ITSM & ITFM ITSM ITFM IT Service IT Financial Management Management ITFM Focus: ITSM Focus: Service Costing & TCO • Service Strategy • Transparency • Service Design • Enable Cost Allocation, • Service Transition • IT Chargeback or Showback Service Operation • Service Benchmarking • Continual Service • Application Rationalization • Improvement Catalog Elevate IT. Ignite Possibility.
Collaboration Between IT & Finance Required • Price & Measure - Remember that for every IT Service you define, you will need to be able to map costs to it and choose a reasonable metric to develop rates and bill consumers • Verify Finance can measure (or reasonably allocate) costs • Verify IT can measure the consumption of the service • Both are needed to produce cost of service, set rates, and bill consumers Elevate IT. Ignite Possibility. 17
Service Catalogs & Models: Real World Examples Client 1 Client 2 Client 3 Client 4 IT Spend $ $100M $385M $190M $400M Model Type Decentralized Centralized Centralized Centralized # of Services 76 50 100 450 # of Budget Lines <2,000 <2,000 <1,000 1,800 Steps in Cost Model ~100 ~25 ~50 ~100 General Methodology Double Step Down Layered Layered Layered Budget Collection Budget Collection • Budget Collection • • Demand Forecast Service Costing • Demand Forecast • • Invoice • Service Costing Rate Setting • Service Costing • • Actual Service • Business Functions Rate Setting Invoice • Rate Setting • • Cost/True-Up Invoice Actual Service • Invoice • • Actual Service Cost/True-Up • Actual Service Cost/ • Cost/True-Up True-up Elevate IT. Ignite Possibility. 18
Building & Managing Cost Models: Managing Complexity 19
What Drives Complexity? Precision traps • Technical accuracy • Financial accuracy • Granularity • Different audiences/different perspectives • Data availability & quality • Elevate IT. Ignite Possibility.
The Sweet Spot Simplicity Complexity • Accuracy drives up complexity; lack of • Easier to digest accuracy can damage credibility • More actionable The • Poor data quality can drive complexity • Management gravitates to simplicity Sweet • Finance and IT gravitate to complexity Spot Elevate IT. Ignite Possibility. 21
Cost Modeling Outcomes 22
Tangible Outcomes & Use Cases What-If Analysis • Control Costs and Consumption • Valuable Benchmarking • Empowered Accountability • Multi-Dimensional Views • Elevate IT. Ignite Possibility.
Multi-Dimensional Views View Services Consumer Application Business Capability Allocates service costs to consumers Allocates service costs to Total Application costs are grouped and Allocates GL costs to IT Service based on usage Applications based on usage allocated to Business Services Example Compute power • End User On premises • • Servers Marketing • • Business Partner Hosting Applications • • Storage Sales • • Cost Center Cloud Hosting • • Application Development Billing • • Department Storage • • Desktop/Laptop • Answers Which business partners • How much are we spending to deliver • consume IT resources? (% and $) each service? Why is my IT bill going up? What is the total cost of my • • What items and services are in my IT • What do I get for my IT applications? What are the technology costs • • bill? expenditure? How much are we spending associated with enabling my Business • What are our unit costs and how do • internally vs hosted? How do my expenses compare to Capabilities ? • they compare? other business partners? What costs and services are included in • How/where can I impact my • the unit rate? budget and corporate profits? Stakeholder IT Executives IT IT Executives Business Partners Executives Executives CIO IT CIO CIO Business Partners The Value/Payoff Understand the cost of services and Insight into which business • • (the data provided components partners benefit from IT Business Service Metrics • Application Rationalization • Align new investments more directly to Understand and drive down unit rates Transparent view of consumption • • • enables): exercises Benchmark against third-parties and rates business functions • peers Helps show value • Elevate IT. Ignite Possibility. 24
The Transparency Journey: Socializing & Defending Your Model 25
3 Phases of Transparency Enabled Challenge Black Hole Decision- Phase Making Challenge Phase: • Educate – Be prepared to educate your consumer on the insights the data provides. • Defend - Be prepared to defend your model – this will require accuracy & detail. Elevate IT. Ignite Possibility.
New Transparency: Challenge Phase Questions • What assumptions are being made? Are they • Embracing the “Aha Moments” accurate and agreed upon? • Has the organization clearly defined and communicated components used to calculate unit rates, consumption rates, • What pieces of data are missing or service costs, etc.? incomplete? • What are the specific calculations being used? • What data collection processes need • What is included/excluded? improvement? • Does data come from the same source? • Which cost groups are associated to • Are there duplicated services and products? costs? • How do general items (such as overhead) impact costs? Elevate IT. Ignite Possibility. 27
Use Case Elevate IT. Ignite Possibility. 28
Use Case Elevate IT. Ignite Possibility. 29
Use Case Elevate IT. Ignite Possibility. 30
Harnessing the Power of Cost Modeling 31
Building Trust • Superior level of detail • Thorough answers • Rapid response Elevate IT. Ignite Possibility.
Stay Focused on Value & Outcomes • Do stakeholders understand their data? • Does it enable impactful decision making? • Has it improved your relationship with the consumer? • Do consumers value IT and what the services provides? Elevate IT. Ignite Possibility. 33
Thank You 34
Appendix
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