Understanding IT Costs

The following is an extract from the 2009 OVUM Butler Group Managing Costs in IT Strategy Report …


In-house IT functions are increasingly tasked to both justify their expenditure on ‘keeping the lights on’ activities and demonstrate the value they provide to the organisation.


Business-as-usual costs are not inconsiderable, usually some three times the value of an organisation’s project-based IT spend, and hence IT functions must ensure that they understand how IT costs are driven and how changes in IT utilisation can affect both unit and total IT costs. The corporate focus on IT value and costs is often driven by the enterprise-wide mandate to ‘do more with less’ and by growing demands for compliance and governance-led transparency. Consequently, IT organisations need to understand, and closely control, the activities that drive IT costs and factors of demand and supply. It is only through the implementation of formal cost management activities that IT functions can deliver cost-effective IT service provision and maximise visibility into related cost structures.

  • IT organisations should leverage enterprise finance expertise to adopt a corporately accepted IT cost measurement.
  • IT and the business must agree the key IT cost metrics for both ongoing performance management and the assessment of service improvement opportunities.
  • An IT function should utilise benchmarking techniques to establish relative cost efficiency and identify opportunities for cost improvement.
  • IT managers need to understand their IT Financial Management processes’ relationships with, and importance to, other IT Service Management processes.


IT organisations should leverage enterprise finance expertise to adopt a corporately accepted IT cost measurement.

With IT expenditure having increased along with the corporate utilisation of, and dependency on, technology, there is now a requirement for more formal management control, methodologies, and particularly measurement of costs within the IT function. When faced with questions such as ‘what percentage of the IT budget is spent on operations and maintenance?’, or ‘what percentage of IT initiatives contribute directly to organisational goals?’, IT management must now be able to provide accurate answers in which they, senior executives, and stakeholders can have confidence.

The primary barrier to IT cost awareness is a lack of tools and methods for measuring IT costs and value, and presenting them from an organisational perspective. An IT management environment usually has plenty of tools for managing technology assets, methods for managing IT delivery, and frameworks to address IT and enterprise architecture, but very few that are capable of uniting the technology, enterprise, and financial aspects of IT. As a consequence IT often continues to be treated as a cost centre, rather than as a business unit, within many organisations.

To identify the costs of IT service provision, an IT organisation needs to create a framework within which all known costs can be recorded and allocated to specific IT services, customers, locations, or other activities. Only in building their IT ‘cost model’ is an IT function truly able to understand the costs incurred and how the costs are driven, and provide a robust foundation for IT chargeback. In creating a corporate IT cost model, IT should use enterprise finance expertise to systematically work up a logical overview of the IT costs incurred and associate these costs with the business’s chosen basis for cost allocation, e.g., by customer.

The cost identification process starts with the categorisation of relevant costs into cost types such as hardware costs, software costs, people costs, accommodation costs, external service costs, and transfer costs. Where external service costs are expenditure such as the procurement of an outsourced service, and transfer costs those that represent goods and services provided by other parts of the organisation. It is important not to miss the latter type of cost as they are both a ‘real’ cost to the organisation and part of the cost of providing the service. Cost types may also be broken down further, into cost elements, if more detail is required to apportion charges (particularly for service-based cost models).

The most common IT cost model, costs-by-customer, requires that these costs are then attributed to the customer that causes them (alternatively, a costs-by-service cost model attributes costs to the services that cause them). These will be direct costs, those clearly attributable to a single customer, and indirect costs, those incurred on behalf of two or more customers that need to be apportioned to multiple customers in an equitable manner. There is also a need to classify costs as either operational or capital expenditure – the distinction required to calculate the annual cost of a capital item as it depreciates over time.


IT and the business must agree the key IT cost metrics for both ongoing performance management and the assessment of service improvement opportunities.

As with any business function, there is a danger that a corporate entity that sets its own performance metrics in isolation, fails to deliver meaningful management information that can subsequently be used to add value to the business. Hence, IT functions need to create their cost-based metrics in conjunction with the business – ensuring that they are relevant and easily measurable; that there is a sufficient number, and type, to cover the breadth of IT service delivery; and that there is scope to improve on base-lined performance to deliver real cost and efficiency improvements.

There is no golden set of IT cost metrics – each organisation will have different strategic drivers, different goals, and different opinions on the metrics required for IT to demonstrate cost efficiency. There are, however, benefits to choosing metrics that can be compared across organisations and against industry standards. Such metrics, trended over time, will help identify both the achievement of efficient performance and opportunities for service (and cost) improvement.

Example cost- and efficiency-related metrics include:

  • IT costs as a percentage of total business operating costs.
  • The average IT cost per employee (or per user if numbers are radically different).
  • The cost of providing generic IT services, such as e-mail accounts, per user.
  • Per-seat application costs, by type.
  • PC and laptop Total Cost of Ownership (TCO).
  • Service Desk costs per user.
  • The average cost per incident handled by the Service Desk.
  • The percentage of incidents dealt with by first-line (Service Desk) operatives.
  • Service Level Management resource costs per IT service, by Service Level Agreement (SLA) type.
  • Percentage reduction in software costs through improved asset control.
  • Change Management resource costs per change, by change type.
  • The average time to diagnose and resolve (or provide a workaround for) problems.
  • Infrastructure utilisation percentages.
  • Percentage reduction in lost business productivity caused by capacity-related incidents.
  • Number, and consequential costs, of major incidents.

An IT function should utilise benchmarking techniques to establish relative cost efficiency and identify opportunities for cost improvement.

Technology plays a pivotal role in the running and evolution of most organisations, with IT systems now an integral part of the business environment. In the past, IT functions were just tasked with providing the required volumes of particular technologies and technology-based services. However, as IT costs have increased, businesses have demanded that the IT services provided by in-house, or outsourced, IT organisations demonstrate both efficient delivery and value for money. Many organisations now use benchmarking as one of their preferred methods of ensuring that the best possible value is being achieved from IT expenditure.

Benchmarking is the comparison of an organisation’s performance against standards of performance set in the enterprise’s sector, and other divisions in the same organisation, or by accepted leaders in the particular area being benchmarked. This is achieved by using standard measurements to compare performance with that of other organisations or industry benchmarks. Benchmarking activity can identify problem areas within the IT function, discover gaps in performance, or find where performance is below that of an organisation’s peers. Whilst it is important to identify areas for improvement, it is also valuable to learn how the better performing enterprises achieve improved effectiveness.

Benchmarking can provide a number of benefits. Most notably it can be a catalyst for improved organisational performance and deliverable quality. By identifying gaps in operational effectiveness, as compared with peers or leaders, more innovative ways of working can be enabled. Benchmarking can also lead to a marked improvement in the organisation’s ability to collect and analyse IT performance data as, before comparisons can be made, a good understanding of an organisation’s internal operation is required. If employed correctly, benchmarking can also lead to better collaboration between both internal personnel and other stakeholders.

At the end of 2008, a survey on ‘Business Improvement and Benchmarking’, conducted on behalf of the Global Benchmarking Network, reported a continued rise in benchmarking adoption. The 450 respondents, from over 40 countries, chose Informal Benchmarking as their third most used improvement tool (after Customer Surveys and SWOT Analysis). Additionally, the tools most likely to increase in popularity over the next three years were cited as Performance Benchmarking, Informal Benchmarking, SWOT Analysis, and Best Practice Benchmarking – with over 60% of organisations not currently using these tools likely to use them.

From an IT Service Management (ITSM) best practice perspective, IT Infrastructure Library (ITIL) v3 espouses the benefits of benchmarking within its portfolio of Continual Service Improvement activities. ITIL’s Service Portfolio Management process also recognises that, by understanding the cost structures applied in the provisioning of a service, an organisation is able to benchmark that service cost against other providers. Or IT financial information, together with service demand and internal capability information, can be used to support decisions as to whether a certain service should be provisioned internally or not. Finally, for IT organisations wishing to benchmark their service management capabilities against a formal standard, ISO/IEC 20000 provides such a formal framework for both audit and certification.

IT managers need to understand their IT Financial Management processes’ relationships with, and importance to, other IT Service Management processes.

IT Financial Management interacts with most ITSM processes but has particular dependencies upon, and responsibilities to: Service Level Management, Capacity Management, and Configuration Management.

Within Service Level Management, the Service Level Agreement (SLA) details both customer expectations and IT function obligations for the relevant IT Service(s). During the creation of the SLA, the potential costs incurred to deliver against customer requirements play a pivotal role in determining the eventual (agreed) parameters of service delivery. In an IT organisation with mature Financial Management processes, the Service Level Manager will liaise with IT Finance to understand the costs of meeting existing and new business requirements and how charging policies (if in place) can affect customer and user behaviour.

By utilising this information, the Service Level Manager is able to create an SLA that best fits both customer and corporate needs – matching service levels to affordability, and supply to demand with the corporately desired level of efficiency. It is worth noting, however, that whilst finance-enabled Service Level Management allows for greater customer variation to service levels (and the associated benefits) it also places greater demands on IT budgeting, accounting, and charging.

Capacity Management is charged with planning and controlling the IT capacity requirements of an organisation. Cost information is a vital input to this process and without it Capacity Managers are unable to accurately estimate the costs of desired capacity or availability for a given system or IT service – and changes in capacity requirements inevitably lead to changes in costs. Capacity information also influences costs. Unit costs may increase because capacity has to be increased for greater levels of resilience or unit costs may fall as a result of improved infrastructure utilisation, of purchasing newer (better value) technology, of economies of scale, or of increased purchasing power.

Configuration Management is the process of providing a logical model of the IT infrastructure by identifying, controlling, maintaining, and verifying the versions of all configuration items. The configuration information, stored within the Configuration Management Database (CMDB), is used in the majority of IT decision-making processes; this includes financial details derived from the budgeting, accounting, and charging processes. Conversely, given that the aim of IT Financial Management is the effective stewardship of IT assets and resources, it is imperative that information from Configuration Management, and in particular from the CMDB, is readily available to IT Finance.

Republished from http://www.ovum.com


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IT Service Management Trends and Hot Topics

The worldwide adoption of IT Service Management (ITSM) policies, processes and enabling tools has grown rapidly in recent years. IT organisations have, in particular, adopted IT Infrastructure Library (ITIL) best practice to provide consistency of process and improve operational performance – propelled by the increasing business demand for IT, the growing enterprise-level reliance on high quality, business-critical IT services, and the increased complexity of the corporate IT infrastructure.

Whilst some IT organisations have still to face the inherent challenges of ITIL adoption, many are at a level of maturity where they could, and should be seeking to further improve their IT performance. However, from a hands-on ITSM Practitioner perspective, it is often difficult to step back from the rigours of day-to-day IT operations to see the improvement opportunities available; opportunities that include cutting costs or reducing wastage, complementing ITIL with other ITSM standards or best practices, reassessing the applicability and cost of existing ITSM-enabling tools, and adding to existing ITIL processes to deliver greater business value.

It is impossible to ignore the fact that the downturn in the economy has impacted IT Operations in many ways by increasing the pressures on CIOs and their teams and accelerating the need for IT organisations to change, to reduce IT costs and deliver more value. Thus, Butler Group is seeing far greater IT and business emphasis on what IT costs, what it delivers to the organisation, and where it can deliver competitive advantage.

Hence the first trend and hot topic is that of reducing ‘IT wastage’, the focusing on activities and solutions that facilitate effective cost management whilst not adversely affecting business service availability. Interestingly, ‘Lean’ has become a commonly used word in an IT context – ‘Lean IT’ – and from an Infrastructure Management perspective, greater corporate attention is being applied to Asset and Capacity Management effectiveness. Butler Group has also observed greater vendor and enterprise interaction in the areas of Application Portfolio Management, Service Portfolio Management, Process Automation, Employee Self-Service, and the use of remote resolution tools as organisations endeavour to optimise their scarce financial and people resources.

The second trend and hot topic is the growing emphasis on multiple IT management frameworks, with the previously posed question of ‘Do you use ITIL or COBIT?’ being replaced with ‘Do you use ITIL and COBIT?’ (Or ISO 20000 or other related standard/set of best practices). Organisations are realising that ITIL has never been (nor was intended to be) a complete, out-of-the-box solution and that it does not have to stand alone.

Whilst ITIL is widely regarded as the de facto standard for ITSM best practice (it’s not proof but the Googling of ‘ITIL’ retrieves 6.8m results compared to 1.3m for ‘ITSM’), organizations are beginning to understand that no one best practice framework can truly act as a ‘silver bullet’ for ITSM and that the optimisation of ITSM activities may need to involve the adoption of various complementary best practices in concert. Up to 40% of organizations say they are now using multiple frameworks, with the combination dependent on the size, nature, and maturity of the organisation and its business objectives.

The following list, whilst not exhaustive, gives an indication of what is currently being used in conjunction with ITIL to improve service delivery: ISO/IEC 20000 – Specification and Code of Practice for ITSM (); COBIT 4.1 (Control Objectives for Information and related Technology); Val IT – a framework for the governance of IT investments (both http://www.isaca.org); Microsoft Operation Framework (MOF); ISO/IEC 27001/2 – Information Security Management Standard; Capability Maturity Model Integration (CMMI); Six Sigma; Application Service Library http://www.aslbislfoundation.org; and ISO/IEC 38500 – a Corporate Governance of IT Standard. Much of this ‘mixing and matching’ of standards and best practice frameworks is being driven by IT governance and, as with ITIL, unless an organisation is aiming for organizational certification it should be used on a ‘take what you need’ basis. Importantly, governance requirements will differ from organisation-toorganisation so there is a need to create a composite of existing best practice frameworks, methodologies, and standards that is organisationally fit-for-purpose.

The third trend and hot topic is the continuing rise of On Demand ITSM, particularly Software-as-a-Service (SaaS), with its profile being raised by the same drivers that are focusing CIOs on the need for effective IT Service Management (ITSM) and IT Infrastructure Library (ITIL) adoption. In Butler Group’s opinion, after the capability/functionality additions necessitated by the move from ITIL v2 to v3, this is the biggest change in the ITSM product landscape in the last five years.

SaaS-delivery is a good fit for ITSM given that, with phased implementation, it can be a relatively low risk environment for both SaaS and ITSM introduction within an organisation; and businesses are now more aware of the benefits and risks of SaaS – the latter of which was a real barrier to early adoption, with some SaaS-only vendors initially needing to start customers on an on-premises SaaS offering. The ITSM tool market is now being filled with SaaSdelivered solutions from both traditional ITSM vendors, with SaaS versions of existing ITSM offerings, and newer SaaS-only vendors.

There are many benefits to be realized through the adoption of SaaS ITSM tool delivery. Given that it should only require a browser and an Internet connection to function – no client to install, no hardware to support, and nothing to upgrade locally – scarce IT resources can be redirected away from ITinternal systems to focus on the delivery of business-critical IT services. SaaS’s simple, subscription-based pricing model – usually a cost per month per user that covers everything needed to operate – provides a lower and consistent level of expenditure that is OPEX rather than a CAPEX investment. The SaaS vendor focus on security (one of the early barriers to adoption), reduced time to deploy (and associated value realisation), effortless upgrades (at least on the customer’s part), and high scalability all make the SaaS-delivery of ITSM-supporting functionality a tempting proposition.

The fourth and final trend and hot topic is the greater attention on, and traction for, three specific ITIL v3 processes within enterprise-level organisations. Vendors and many organizations that have long since put a tick in the proverbial box against traditional ITIL processes are now applying focus to Service Catalogue Management, IT Financial Management, and Service Portfolio Management. In Butler Group’s opinion, this is firmly driven by the need to increase IT-to-business alignment, reduce the cost of ongoing service provision, and improve IT governance. These three ITIL processes are closely linked, with their real value derived from ‘getting under the skin’ of IT services to determine the business value that they deliver relative to the resources (people and financial) they consume.

Service Catalogue Management, fed by the Service Level Management process, facilitates the creation and publication of both business and technical services, and can be a key tool for the improvement of Service Management. In particular, Service Managers can use the Service Catalogue Management process (and enabling technology) to easily define the service lifecycle for each service including service terms, entitlements, Service Level Agreements (SLAs), resource requirements, workflow procedures, and retirement activities. An effective Service Catalogue can raise IT service awareness (within the business) and can reduce the labour overhead involved in handling service requests when made available, with appropriate authority levels and workflow, as part of an IT organisation’s Employee Self-Service facility.

The current focus on IT Financial Management is a no-brainer in the current financial climate, with vendors adding or beefing up products in this area. ITIL has long espoused the benefits of IT Financial Management: Budgeting, Accounting, and Charging or Chargeback (even if notional). There is obvious value in understanding what IT Services cost and their associated cost drivers, using financially-based demand management techniques to smooth out usage peaks and troughs, and providing customers with information on, and the ‘pain’ of paying for, the IT services they consume.

However, in Butler Group’s opinion real business benefits start to emerge when IT services are subject to Service Portfolio Management, as cost of provision is compared to delivered business value. There are, however, at least two possible interpretations of the term ‘Service Portfolio Management’. ‘Service Portfolio’ Management and ‘Service’ Portfolio Management, i.e. managing the Service Portfolio versus applying Portfolio Management tools and techniques to Services and unfortunately, it is all too easy for IT organisations to consider delivering against the former definition as sufficient.

ITIL v3 defines Service Portfolio Management as ‘a dynamic method for governing investments in Service Management across the enterprise and managing them for value’. However, in Butler Group’s opinion the ITIL v3 Service Strategy book falls short of practically explaining Portfolio Management, in the context of the capabilities of powerful Portfolio Management tools, to the reader. What ITIL terms the ‘Analyse’ work method requires an organisation to ‘maximise portfolio value, align and prioritise, and balance supply and demand’ is true, but the complexity involved is not apparent.

Butler Group is a strong advocate of Portfolio Management per se, and a framework of Portfolio Management policies, processes, and enabling technology can help to prioritise and manage the utilisation of scarce corporate resources against organisational need and provide an essential element of IT governance – helping to minimise risk and maximise ROI in the selection of the right blend and balance of investment. Unfortunately for ITIL practitioners, however, the capabilities required to effectively deliver Service Portfolio Management are probably best delivered via a Project & Portfolio Management solution, or niche Service Portfolio Management solution, rather than an all-encompassing ITSM solution.

In summary, the trends and hot topics offered within this article are not exhaustive but Butler Group hopes that they provide valuable food for thought and improvement activity for the overstretched ITSM professionals in Enterprise ITland.

Republished from http://www.butlergroup.com