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Running IT Like A Business
Implementing Service Catalogs, Service
Costing, and Unit Cost Management
Prepared for: The World of IT Financial Management
Savannah, GA July 9, 2013
Ron Bradley
Boris Pevzner
Ron Bradley MBA, CPA
• 25 years in Utility industry, previously Director of Activity-based Costing and Performance Management for Central and South West Services (CSW).
• Consulting for 15 years, currently Executive Director and Principal Consultant for CRG USA.
• Previous consulting clients include:
– BC Hydro, Barclays Bank (UK), Tampa Electric, Alliant Energy, Williams Communications, Department of Energy, World Bank, City of Nashville, Arctic Slope Regional Corporation, Barbados Light & Power, AFLAC, State of Iowa, FDA, ABN AMRO, US Dept of State, Kansas City Southern Railway, Bank of the West, Raymond James, Metavie Blue Cross, McGraw Hill IT, PPL Electric Utilities, AAA NCNU, Union Pacific Railway
Boris Pevzner (President, Lontra)
• Advising senior IT executives of Fortune 500 companies on re-aligning IT operations around a service-oriented IT delivery model.
• Frequent speaker at technology conferences on IT transformation, ITIL®, and service-oriented IT delivery.
• CIO blog (http://blog.lontra.com) offers thought-leading advice and opinions based on his experiences in developing service-oriented IT delivery concepts and methodologies.
• “Running IT Like A Business” book coming out in late 2013.
• Training in theoretical physics; Bachelor's and Master's degrees in Electrical Engineering and Computer Science from the Massachusetts Institute of Technology.
Value? The implementation of the “Running IT Like a Business”
framework enables IT management to readily separate
trends in service unit costs from fluctuations in service
demand.
The unit costs for every “Service” can then be
benchmarked against industry peers or external
markets. If IT service providers can deliver services with
the same quality and market-comparable unit prices,
this provides a measurable indicator of “IT value.”
Lontra / ITFMA 2009 Attitudes Survey
• Survey was conducted in 2009 by Lontra in association with the IT Financial Management Association (ITFMA).
• 154 ITSM and ITFM professionals responded to the survey. More than half of the respondents (59%+) were at the manager level and above, with 13% at the CxO/VP level.
• Survey was designed to elicit the prevailing trends and attitudes among ITSM and ITFM professionals.
• We used an array of 33 questions to measure each respondent's assessment of the IT Service Catalog adoption and ITFM maturity of their IT organization.
• We used a set of 14 questions to measure their assessment of their IT organization's success.
ITSM/ITFM Interests vs 2009 Priorities Interests / Priorities 2009 Priority
rank
Interest
rank
Cutting IT costs and managing IT spend 1 2
Making IT operations more streamlined and efficient 2 3
Aligning IT with the business 3 4
Achieving cost transparency in my IT organization 4 5
Improving the satisfaction of my business customers with services
offered by IT
5 6
Implementing fair consumption based cost recovery (chargeback)
for IT products and services
6 12
Developing and using IT performance metrics 7 1
Managing business demand for IT services 8 8
Creating a robust, repeatable cost model for IT offerings 9 7
Comparing your IT organization's performance and costs against
external benchmarks and peer groups
10 9
Adopting ITIL Standards and Processes 11 18
Making better informed sourcing decisions (outsourcing vs
insourcing)
12 20
(n=138)
Adopting ITIL standards and processes
Creating a robust, repeatable cost model for IT
Pricing IT services appropriately based on customer
Achieving cost transparency in my IT organization
Implementing chargeback for IT services
(n=115)
2009 Priorities by Demographic
8
Q9. The Zeitgeist Question: What phrase best captures your organization's ITSM/ITFM priorities for 2009?
(n=98)
The Zeitgeist Question
Zeitgeist Phrase
Running IT Like A Business 33%
Cutting Costs At All Costs 17%
Efficiency, Efficiency, Efficiency 17%
This Is The Year Of The Metric 12%
Other 6%
New Technology for a Brighter Future 5%
The ITIL Way Is The Right Way 5%
Customers Should Pay For What They Get 4%
Write-ins: • IT is a trusted business partner that delivers value • Better align IT to customer's needs and cooperatively determine IT priorities for the year • Proving value to the customer • IT Strategic Plan Maps to Business Strategic Plan • Your Vision is Our Mission
Overall IT Management Maturity vs IT Success
(n=101)
ITSM / ITFM maturity is highly correlated with IT success!
Maturity Subsets vs IT Success
(n=101)
Co
rrel
atio
n w
ith
IT S
ucc
ess
Service Portfolio Adoption Maturity
IT organizations implementing IT Demand Management around the Service Portfolio can expect almost twice the level of IT success as those that implement just the Service Portfolio alone.
Three Main Survey Takeaways
• IT organizations’ 2009 priorities centered on cutting IT costs, managing IT spend, and implementing cost transparency
• Service-Based IT Management maturity level is highly correlated with business success
– IT organizations implementing IT Demand Management around the Service Portfolio can expect almost twice the level of IT success as those that implement just the Service Portfolio alone
• “Running IT Like A Business” is the Zeitgeist of today’s IT management
– Focus on the Customer is particularly pronounced among IT leadership
1
2
3
SUCSESS™ Methodology 10 Easy Steps to Running IT Like a Business
Step 1
IT (Technical) SERVICES INVENTORY
BUSINESS SERVICES INVENTORY
HIERARCHICAL SERVICE PORTFOLIO
SERVICE UNIT COST MODELING
SERVICE PRICING
SERVICE COST TRANSPARENCY
DEMAND-DRIVEN BUDGETING AND PLANNING
Step 2
Step 3
Step 4
Step 5
Step 7
Step 8
SUCSESS™ = Service Unit Costing Strategy for Enterprise Shared Services
Step 6
BUSINESS PLANNING SCENARIOS
Step 9
COMMUNICATION AND ROLLOUT Step 10
SERVICE COST BENCHMARKING
WHAT
do we charge for them?
will the business benefit?
service do we offer?
HOW MUCH
HOW
Workshop Contents
1. Service Catalog Taxonomy
2. Service-Based Cost Model
3. Project Accounting Recommendation for Infrastructure Costs
4. Variability Analysis
5. Comparison of “Current” Cost Recovery Methodology to “SUCSESS” Methodology
6. Service Unit Demand Forecasting
7. Implementation Steps
13
1. Service Catalog Taxonomy
15
Customer Invoice
Monthly Invoice
Service Versus Technology Analogy
Menu Starters Entrees Deserts
Wine List Fix Menu Options or A-la-Carte
Assembled Service Offerings Technology Ingredients
Service = Outcomes Not Resources An SLA on a Server or an Application in isolation
is like crafting an SLA on estimated Pickle Consumption
Two-Level Service Model
CUSTOMER
Personal Computing
Email Shared Printer
Technical
Services Server Storage Network
Support Apps
Business
Services
CUSTOMER
BENEFITS
Accuracy: Each customer is charged for exactly how many PCs, Email accounts, Printers, etc. they use.
Cost management: Unit costs for each service allow to benchmark and manage costs from the supply side.
Demand management: Understanding unit costs and consumption allows business units to understand and manage their demand for IT services.
DRAWBACKS
Complexity: Too many items on the bill; more difficult for customers to understand.
Three-Level Service Model
Staff Productivity Service
Personal Computing
Email Shared Printer
Technical
Services Server Storage Network
Support Apps
Business
Services
Billable
Services
CUSTOMER This is a true service, all relevant PC,
Email, etc. costs roll up into this service.
# intranet accts
BENEFITS
Simplicity: Fewer items appear on the bill – Staff Productivity Service instead of its 10 component services
Cost management: Unit costs for each service allow to benchmark and manage costs from the supply side.
DRAWBACKS
Loss of cost transparency: Business customers no longer know how many PCs, Email accounts, Printers, etc. they consume.
Loss of accuracy: Therefore, segments that use more IT services are implicitly rewarded at the expense of more frugal segments, and we don’t know which is which.
Loss of demand management capability: This removes both the necessary information and the incentive for business segments to manage demand.
Supporting Services
• Three-tier • Two-tier • Mainframe • Server Farm • SOA • SaaS
Application Hosting
• Server Storage • Backup/Restore • Shared Network
Storage • File Services
Storage
• Windows, fully managed
• Windows, partially managed
• Linux, fully managed • Linux, partially
managed
Server
• Identity / Access management
• Application-Specific Security
Security
• Internal Network • Monitoring • Remote Connectivity
Network
• Project Support • Application Support • IT Lifecycle
Management and Governance Services
• Infrastructure Optimization Services
• Technical Documentation
Consulting
• Helpdesk • Database Support • Desktop Support • Application-Specific
Support
Support
Application & Subscription Services
• Customer Relationship Mgmt App • Financial Mgmt App • ERP App • Billing System • Human Resources Mgmt App • Product Mgmt App • Reporting / Analysis App • Industry Newswire • Industry Data & Analysis Portal
Customer-Facing Services
• Office Desk Phone • Mobile Phone • Contact Center
Enablement
Telecom
• Multi-Function Device • Stand-Alone Personal
Printer • Scanner • Projector
Print-Scan-Copy-Fax
• Desktop PC • Server-grade Tower • PC Software Images
Personal Computing
• Collaborating and Instant Messaging
• Email • Web Conferencing
Messaging and Collaboration
• Custom Reporting • Project Management • Technical Consulting • Application
Development • Customer Training
Professional Services
Customer Profile Bundles
• Business Development • Inside Sales • Sales Rep • Manager
Sales
• Analyst • Coordinator • Manager • Specialist
Marketing
• Benefits Administration • Compensation • Safety • Training
Human Resources
• Accounts Payable • Accounts Receivable • Payroll • Tax
Finance
• Customer Service • Project Management • Order Management
Customer Relationship Management
Service Catalog Hierarchy (Taxonomy)
Supporting Services
• Three-tier • Two-tier • Mainframe • Server Farm • SOA • SaaS
Application Hosting
• Server Storage • Backup/Restore • Shared Network
Storage • File Services
Storage
• Windows, fully managed
• Windows, partially managed
• Linux, fully managed • Linux, partially
managed
Server
• Identity / Access management
• Application-Specific Security
Security
• Internal Network • Monitoring • Remote Connectivity
Network
• Project Support • Application Support • IT Lifecycle
Management and Governance Services
• Infrastructure Optimization Services
• Technical Documentation
Consulting
• Helpdesk • Database Support • Desktop Support • Application-Specific
Support
Support
Application & Subscription Services
• Customer Relationship Mgmt App • Financial Mgmt App • ERP App • Billing System • Human Resources Mgmt App • Product Mgmt App • Reporting / Analysis App • Industry Newswire • Industry Data & Analysis Portal
Customer-Facing Services
• Office Desk Phone • Mobile Phone • Contact Center
Enablement
Telecom
• Multi-Function Device • Stand-Alone Personal
Printer • Scanner • Projector
Print-Scan-Copy-Fax
• Desktop PC • Notebook PC • Server-grade Tower • PC Software Images
Personal Computing
• Collaborating and Instant Messaging
• Email • Web Conferencing
Messaging and Collaboration
• Custom Reporting • Project Management • Technical Consulting • Application
Development • Customer Training
Professional Services
Customer Profile Bundles
• Business Development • Inside Sales • Sales Rep • Manager
Sales
• Analyst • Coordinator • Manager • Specialist
Marketing
• Benefits Administration • Compensation • Safety • Training
Human Resources
• Accounts Payable • Accounts Receivable • Payroll • Tax
Finance
• Customer Service • Project Management • Order Management
Customer Relationship Management
Choices Within The Service Catalog (Taxonomy)
Choices
• Standard Cell
• Smartphone
• Pager
Choices
• Desktop / Laptop
• Windows / Unix
• Office User / Home User /
Unmanned
Choices
• Standard User
• Power User
• Admin-Level User
Choices
• Small / Medium / Large
• Local / SAN / NAS
• Tier 1, 2, 3, 4
• Mirrored / Not Mirrored
• Replicated/ Not Replicated
21
Project Accounting Recommendation
• Too varied to be modeled as a “regular” service; one-time projects, different every time and cannot be standardized
• Should these be in the service catalog?
– Option 1: Model as a consulting service within catalog
• Cost: per hour for each employee type + equipment costs
• Price: per hour using a blended hourly rate
– Can use different rates for different employee types, but that leads to unnecessary micromanagement by customer
– Option 2: Model as a project outside of the catalog
• Treat project as customer, bill services to it
– Can model this as a project (outside the service catalog) that consumes multiple services from the catalog (e.g. consulting, personal computing, etc.)
• Important distinction: business project or internal project?
– Business: A business segment asks for a specific infrastructure improvement
• Example: S&P asks for faster network infrastructure and is willing to fund it
• Paid for by business segment directly using per-hour rates or negotiated project price
• See options above
– Internal: IT decides to take on a project without explicit business sponsorship
• Example: IT decides to migrate several applications to virtual servers to save money
• IT initiative like this should be funded by IT itself and not reflected in customer prices
• Should be part of overhead costs
Business Requests for Applications and Business Systems
Enterprise Business Solutions with best-in-class TCO
The technology factory takes business requests for business applications and business systems and converts these requests into business solutions
for the enterprise customers (business units)
Cost (TCO) Drivers
Outputs Inputs
Quality Security Flexibility Level of Complexity Business Continuity
- Authentication
- Authorization
- Non-Repudiation
- Encryption
- Level of Data
- Firewall & Detection
- Reliability
- Availability
- Performance - Responsiveness
- Support
- Scalability
-Enterprise
- Std. Hardware Components
- Std. Software Components
- Standard Tools
- Standard Processes
- Standard Support
- Capacity Requirements
- Disaster Recovery
- Operation Recovery
- Backup Strategy
- Data Strategy
- Placement
-Number of Exceptions
-Stds based on Bus. Reqs.
- Classes of Services Available
- Thin Client / Server Based
Standardized Component Services
- Training
“From Craftsmen to Factory” – Major Application Cost Drivers
Service Choices at different Service Levels at different Price Points
23
Service Catalog Best Practices
Hierarchical
Identify business and component services, with
explicit consumption drivers
Service packages
Give users choices within each service, while
standardizing offerings
Prices
Establish explicit price for each service / service
package in the catalog
Role-based bundles
Group of service packages based on employee roles for faster, better, more consistent service
Gartner and industry alignment
Align with Gartner benchmarking methodology,
industry standards and best practices
Goal Recommendation
Hierarchical Service Catalog Design
End-User/Client Services
Business Process Enabling Services
Business Infrastructure & Support Services
IT Systems Services
IT Infrastructure & Support Services
IT Component Services
Typical Service Interactions Among Service Tiers:
Business Systems Services
Physical Assets
Facilities
Employee Onboarding
User Application Access
Quote-To-Cash Process
B2B Trading Process
E-Mail Service
Oracle eBusiness Suite 11i
Managed Database
Managed Server
Oracle 9i RAC Database
Dell PowerEdge 6650 Service
Data Backup Service
Windows Server 2003 DE
ERP System
Finance System
Dell PowerEdge 6650 Server Asset
Oracle eBusiness Suite 11i Asset
Datacenter
Space, Power, HVAC
Service examples
• IT Business (End Users, Business Units) • IT (App.Dev.) IT (Infrastructure) • IT External Providers, Partners, Suppliers
Typical Service Catalog Hierarchy
• Hierarchical: Business and Component services, with explicit consumption drivers
• Service packages: Give users choices within each service, while standardizing offerings
• Prices: Each service / service package in the catalog has an explicitly stated price
• Role-based bundles: Groups of service packages based on employee roles for faster, better, more consistent service
• Gartner and industry alignment: Aligned with Gartner benchmarking methodology and industry standards and best practices
Service-Based Costing
The Fundamental Formula of ITFM
Supply Costs
Demand Costs
IT Supply and Demand Trends Total IT Spend Management
= Cost Management
+ Demand Management
You cannot control Cost without having defined and costed the services. You cannot shape Demand without standardized service units.
Your cannot manage Total Spend without Service Unit Costing discipline.
Incremental Demand Costs
Baseline Supply Costs
•Productize and Brand Services –
•Products branded in terms of business value, service levels, price, and service owner(s) for each product
•Associate “Business Services” with internal components –
•Model supporting “ Service Components” (Bills of Materials)
•Understandable Price Points –
•Differentiated Price Points Supported by a highly transparent cost model
•Economic Model –
•LOBs evaluate SS “Value” based on P x Q Invoicing Model
• Service Demand Forecasting –
• Rolling service demand forecasts enable value-based cost management
Shared Service Financial Management
“For SS to establish a true business relationship
with internal business units, a clear economic
transaction must be defined…”
29
Guidelines • Design cost models that are
integrated with the service catalog
• Make sure that service unit costs are benchmarkable
• Always begin with a Financial source (G/L or Budget)
• Ensure 100% recovery of IT spending via unit costing/pricing
• Track current and future service unit costs and trends
Service-Based Cost Modeling/Management
30
Customer Invoice
Monthly Invoice
Cost Model Assumptions and Caveats – High-Level
• It’s easier to do a full model than a partial one – When determining what to include, compromises
inevitably have to be made, shortcuts taken, and approximations made; with a full model, this is unnecessary
• It’s better to be approximately right than precisely wrong – Service Catalog hierarchy and consumption drivers
represent best practice; the cost model is an approximation of that using the data we had access to
– Trying to be too precise on a first pass can lead to getting bogged down in details; it is more productive to get a rough model in place, and then refine it
Multi-Dimensional Service Unit Cost Model
Service Delivery Teams
Service Hierarchy From Service Catalog
Delivery Processes
Customer Consumption
12 month view of G/L or budgeted
cost data
Reassign GL data into appropriate Delivery
Teams and summary
accounts
Assign Team costs to Service Delivery
processes and assets
Assign process output and component assets
to services in the
catalog
Consumption by customer drives
Quantity x Price
recoveries
CIO Office
Network Ops
Server Mgmt
Help Desk
Hardware Utilization
Software
Labor
SAP Hosting
Database Services
Storage Services
Invoicing based on service consumption Quantity x Price
By Type
By Type
By Process or Activity
G/L
Departments and Accounts
Depreciation
Operating SW
Facilities
Labor
3rd party
Total G/L Cost = Sum of all Services Quantity x Price (100% Cost Recovery)
6/17/2013
98142 – Employee-Based OE
Maintain Server HW (Unplanned)
Deploy Servers
Update/Upgrade Server HW
Business Partners
Application Usage
Business Apps
# of Deployed Physical Servers Windows – 52
Linux – 119
% ofTime
Provide Support & Troubleshoot – Server
SW
Update/Upgrade Infr SW
# of Operating Windows Servers
Windows Physical Server Hosting
Unix/Linux Virtual Server Hosting
0.13
1.47
12.55
38.67
30.31
# of Operating Servers
98142 – External
Provider OE
Unix/Linux Hypervisor
Windows Virtual Server Hosting
Windows Hypervisor
Unix/Linux Physical Server Hosting
Server Operating System Service -
Windows100%
Asset Consumption
# of Hypervisors
# of Hypervisors
Server Infrastructure2012 Actual
98142 – Intern-Based
OE
% ofTime
1,603
1,597
714
730
103
136
Manage & Perform Recruiting
0.93IT Recruiting Service100%
Maintain Infr SW(Unplanned)
0.35
Manage Distributed Monitoring, Field
Devices & Central Event Console
15.59
% ofTime
6/17/2013
91731 – Employee-Based OE
Monitor the IT Enterprise
Deploy Application Changes
Provide Support & Troubleshoot
Manage Follow-up & Root Cause Analysis
% of Time
# of TRM Tickets
% of Problems(Problem Logs)
Change Mgmt Service
Business Apps
Business Partners
Application Usage
# of Changes100%
Asset Consumption
Network Monitoring Service
Network Service - Core
# ofConfigured
Ports
Windows Physical Server Hosting
Unix/Linux Virtual Server Hosting
Mainframe Hosting
50
Mainframe Monitoring Service
% of FTE
Distributed Monitoring Service
23
5
20
Provide DR Test Support2Data & System
Protection Service100%
Data CenterSQ FT
# Avg Peak Demand
- MIPS
# ofNetworkTickets(TRM)
# of Operating
Servers
Network Service - Railroad
# of RouteMiles
Unix/Linux Physical Server Hosting
Windows Virtual Server Hosting
Command Center2012 Actual
91731 – Intern-Based
OE
% of Time
Unix/Linux Hypervisor
Windows Hypervisor
# of Hypervisors
# of Hypervisors
Monitor the IT Enterprise
Provide Support & Troubleshoot
Manage Follow-up & Root Cause Analysis
Deploy Application Changes
0.26
10.02
36.99
52.73
38
26
36
Unit Cost Example 1: Email
Unit Cost Example 1: Email
39
Unit Cost Example 2: Enterprise Data Exchange
Unit Cost Example 3: Microstrategy
41
Planning a New Application with the Model
• Step 1: Determine application needs in business terms
– E.g. number of users, number of transactions, business criticality, etc.
– Understand why the business needs the app, who will be using it, and how they will be using it
• Step 2: Translate business needs into technical needs
– E.g. server SUs, storage GBs, traffic GBs, support hrs, DB management, etc.
– Server, storage, network, and support are typically the biggest drivers of application cost
• Step 3: Use Lontra model to determine application cost and variability
– Compute application total cost using svc unit costs from the model and tech application needs from Step 2
– Compute application variability using svc variabilities and proportion of app cost that comes from each svc
– Compute application unit cost using total cost and the estimated number of users
– Multiple implementation scenarios are often possible; compare their costs and variabilities
• Step 4: Analyze the data and make sound business decisions
Example Scenario Possible Action
Application cost is too high; model indicates that 60% of cost comes from storage
See if storage use can be decreased, or if using storage of a lower tier is an option
Application unit cost is too high Perhaps application development should wait until there is more demand, so that costs are lowered
Application variability is too high, making the investment too risky; model indicates that 60% of cost comes from servers
See if server use can be decreased; or use the more variable virtual server option; or look into outsourcing server processing
Variability Analysis
43
Service Cost Variability: Overview
• Definition: Sensitivity of total service cost to variations in demand
– 0% variability = completely fixed costs: a 10% reduction in demand will cause 0 reduction in service cost
– 100% variability = completely variable costs: a 10%reduction in demand will cause a 10% reduction in cost
– 30% variability = 30% variable, 70% fixed costs: a 10% reduction in demand will cause a 3% reduction in cost
• Time Scale: 1 year
– On a long enough timeline, all costs are variable!
– Typically, when people think variability, the implied timescale is a budget cycle; that is why we chose 1 year
• Value: Understanding service variability enables critical business decisions
– Business Problem: I need to cut costs. Where do I make cuts to maximize immediate effect?
• Start by looking at high cost, high variability services; avoid low cost, low variability services
– Business Problem: A very useful app is only available to a select group of users. IT is considering rolling out the app to a broader user base. The costs and risks of such an effort must be evaluated.
• Knowing the application’s variability index provides answers. For instance:
– High cost, low variability investments tend to be high risk – if something goes wrong, you still have a lot of sunk costs
– A high variability investment is best – costs are easy to cut when needed
• The same kind of analysis can be done for a brand new application by modeling the new app’s costs using the Lontra model before rolling it out
• Value: Understanding variability provides opportunities for service improvement
– Low cost, high variability services are the best kind: low investment, low risk
– Reducing costs is familiar: trim fat, increase process efficiency, standardize, etc.
– Raising variability is less familiar because most orgs don’t understand variability – but it is important for reducing the risk of a service investment
– How do we increase variability? Automation, new technologies, outsourcing, other means
44
Service Cost Variability: Methodology
• Methodology: Assign variability at team/account intersection, then propagate through cost model in proportion with cost assignments
• Choosing where to assign initial variabilities: Assign at the team/account intersection
– Variability is dependent on both teams and accounts
• Different accounts have different variabilities: e.g. Consulting will usually have higher variability than Hardware
• The same accounts have different variabilities in different teams: e.g. Salaries may be more variable in Team A vs Team B
• For more granularity, it is possible to assign at cost center/account intersection; but this is usually unnecessary
– In our model, we simplified by assigning at the account level, rather than the team/account intersection
ACCOUNT VARIABILITY
Salaries 25.00%
Fringe 25.00%
Other Comp 100.00%
T&E 70.00%
Rent 10.00%
Circuit Costs 10.00%
Telephone Charges 50.00%
Consulting Charges 100.00%
Site Management Fees 5.00%
Software Maintenance & Support 5.00%
Hardware Maintenance 25.00%
Equipment Rental 80.00%
Amort & Depreciation 0.00%
Internal Charge Transfers 100.00%
Other Expenses 50.00%
Assigning initial variability values: There is no right answer! Use your best judgment, and refine over time
– Variability is different in different orgs because it depends on company policy, contracts, business outlook, etc.
– Some rules of thumb: Third-party costs (Consulting, etc.) tend to be high variability, though it
depends on contract specifics
Rent and depreciation costs tend to be low variability – you have to pay even if you are no longer using the space/hardware
People costs (Salaries, etc.) tend to fall somewhere in the middle
Propagating through the model: computed automatically, in proportion with cost assignments
– Variability computed at each step, so final service variability ties back to the assigned team/account variability
– Example: Suppose Server var = 40%, Storage var = 70%
Suppose App A gets 80% of its cost from Server, and 20% from Storage
Calculate variability: 40%x80% + 70%x20% = 46%
App A variability = 46%
45
Variability - Applications
0% 10% 20% 30% 40% 50%
eCommerce Gen II
Grid Computing POC
Voice Pick
Solution Framework
Zoo
S&P Funds Universe
ChemDraw
Project Network
EWS
S&P.com Global Web Site
TM1
CBT.com OAS Prod
Electronic and Hand Scoring …
Platts.com
Vertex
Unassigned
Enterprise Data Exchange
ERP (Oracle 11I)
JDPA Interwoven Product …
Microstrategy/HR Data …
Variability - Applications
• Microstrategy has high variability because more than half of its costs come from storage, a high-variability supporting service
Drilling down to account level shows that Equipment Rental (assigned variability of 80%) is the largest account component of Microstrategy
46
Variability - Infrastructure
0% 20% 40% 60% 80%
Network - LAN
Server - Mainframe
Network - IAS
Server - Virtual
Network - MAN
Server - Unix
Server - Wintel
Storage - Tier 4
Support - Technology Help Desk
Network - WAN
Storage - Tier 3
Storage - Tier 2
Storage - Tier 1
Support - Desk-Side Support
Variability - Infrastructure
• Storage and Desk-Side Support have high variability because they are largely outsourced
• Why do different storage tiers have different variabilities?
Because highly variable equipment rental costs are proportionally higher for higher tier storage
Comparison of “Typical” Cost Recovery Methodology to “SUCSESS” Methodology
“Typical” Cost Recovery vs SUCSESS Model
Pass-through – for centrally billed Telecom charges
Typical
Rate Card – Cost recovery based on # of Intranet Users (Includes staff-related, maintenance, storage and depreciation for Distributed Client Computing Engineering, Messaging, Help Desk and related services)
SUCSESS
Application Support – cost of providing support for production applications and development environments. Includes staff related costs, maintenance, storage, depreciation and data center rent. Assigned to Segments based on # of Service Units – adjusted for historical levels of IT spend.
Direct Charges – specific to on-demand requests (currently includes Email and Capacity-on-Demand)
HIERARCHICAL SERVICE CATALOG
Cost Recovery Recommendations
• Align cost recovery with consumption
– Customers should pay for what they use; therefore units of charge should be consumption-based
– Invoiced customer-facing services should be easily understandable by the customer
• Make subsidies explicit: decouple cost from price
– Cost = $ spent on producing a service/product
– Price = $ charged for a service/product
– To run IT like a business we must know both cost and price for each service
– If price is set to something other than cost, we must have a clear understanding of:
• The reasons for the difference (e.g. ability to pay, adoption incentive, etc.)
• The amount of the difference (e.g. price for ERP is 30% below cost)
• The flow of subsidies (e.g. S&P subsidizes I&M, physical servers apps subsidize virtual server apps, etc.)
• Remove Corp segment from cost recovery
– Corporate IT costs are really an overhead “cost of doing business”
– IT should only charge profit centers, distributing overhead cost among them
50
Customer Invoice
Monthly Invoice
Demand Forecasting
Virtualization Scenario – Effects on the Unit Cost Outcome
Cost/Price per Unit
Reduced Power Bill
Reduced Lease Cost
Reduced Labor Cost
Improve Process Output
Any change in people, assets, process, configuration, consumption, and/or drivers can be modeled.
Service Delivery Teams
Service Hierarchy
Delivery Processes and Assets
Customer Demand in Units
G/L Departments and Accounts
Reduced Depreciation & Support
Higher Utilization
Lower Power Consumption
Less Floor Space
Increased Automation
More demand delivered
Implementation Steps
Project Steps – Implementation Roadmap
Deliverables:
• Service Taxonomy : Define every Support Service, Customer-Facing, and Role-Based Service
• Model : Cost Model to determine the unit cost and price
points for every Support Service, Customer-Facing, and Role- Based Service
• Invoicing : Develop a monthly invoicing solution that utilizes
Customer-Facing Service Fixed Price x Monthly Quantity methodology.
• Demand Forecasting : Develop a process and tool for forecasting the unit
demand for each Support Service, Customer-Facing Service, and Role-Based Service.
Project Steps – Implementation Roadmap
Work Plan Steps:
1. Prepare • Service Catalog: Finalize the recommended Service Taxonomy with full
approval of Leadership • Org Structure: Align Cost Centers with the Team Structure (if necessary)
2. Develop • Use Interview Templates to gather/model the cost flow for every cost center
in every team • Document all driver data requirements and coordinate the gathering of the
driver data with team leaders and/or other applicable employees • Complete the cost model design and build with above data
3. Fine-Tune • Present/review model outcomes with Leadership • Make model adjustments based on the leadership/stakeholder reviews • Finalize the model and present to Executive Team
4. Develop an implementation plan to transform from the current model to the new model
Note: These steps can be used for either a “Pilot” project (a small subset of Services), or a full costing and Recovery solution.
SUCSESS™ Methodology 10 Easy Steps to Running IT Like a Business
IT (Technical) SERVICES INVENTORY
BUSINESS SERVICES INVENTORY
HIERARCHICAL SERVICE PORTFOLIO
SERVICE UNIT COST MODELING
SERVICE PRICING
SERVICE COST TRANSPARENCY
DEMAND-DRIVEN BUDGETING AND PLANNING
Step 2
Step 3
Step 4
Step 5
Step 7
Step 8
SUCSESS™ = Service Unit Costing Strategy for Enterprise Shared Services
Step 6
BUSINESS PLANNING SCENARIOS
Step 9
COMMUNICATION AND ROLLOUT Step 10
SERVICE COST BENCHMARKING
WHAT
do we charge for them?
will the business benefit?
service do we offer?
HOW MUCH
HOW
Step 1
Running IT Like A Business
Implementing Service Catalogs, Service
Costing, and Unit Cost Management
Prepared for: The World of IT Financial Management
Savannah, GA July 9, 2013
Ron Bradley
Boris Pevzner
