What is the IT customer paying for, anyway?

These are the questions that always irk me, “Why should I, the customer, pay IT $3000+ a year for the privilege of using my own computer when I can buy one from Best Buy or Dell for $500?”  There are two reasons these questions bother me – one it means that we in IT are viewed as outsiders by the customer and not as business partners and second, more importantly, the customer doesn’t see the value in what IT is doing.  Bottom line: we in IT have done a poor job explaining what goes into a service and what the value is behind our charges.

Often this poor communication belies a lack of understanding ourselves.  All too often these costs are built on an arbitrary allocation scheme so we really don’t know if they are reasonable or not. How can we hope to do a good job of explaining it to the customer what we don’t know ourselves?  The key is creating a methodology that both aligns the services with what the customer wants and allows for real transparency in the costs.

These are not easy tasks. The IT organization has always been the lightning rod for demand within the enterprise, and never more so than today.  More and more businesses seek to seize economies of scale and deliver great services through centralized shared services.  At the same time IT is looking to align with industry frameworks/methodologies such as ITIL, PMI, Lean IT and Agile, all while lowering costs and trying its best to keep the lights on.  At the end of the day, the costs of the IT organization are borne by the business, either through an allocation or chargeback scheme.  Naturally, the IT customer wants assurances that they are getting value for money – basically their question is “What am I paying for, anyway?”

In order to be a strategic partner with the business, the IT organization needs to be able to answer these key questions
• What do we sell?  (Service catalog)
• How much does it cost? ( Financial management)
• What performance can the customer expect? (Service Level Management)
This doesn’t just happen.  It will involve some investment in developing the necessary processes and underlying technology. 

What do we sell? - Defining the Service Catalog
Experience shows that this is best done from the top down by first identifying the major categories of services.  The following illustrates how this was developed in a recent consulting engagement:

On the left you see the Business Services – the customer facing view of the catalog.  This is the key to creating a real sense of alignment and partnership with the customer.  To begin, we established these four broad categories of services: Users, Hosting, Business Solutions and Professional Services.  Certainly there are other possibilities – Communication is often a separate category for example.

These in turn were subdivided into major process areas.  Business Solutions was divided into functional business processes such as Order to Cash, Budget to Report, Hire to Retire, etc.  The Users category was divided into Workstation Support, Voice and others.  Each of these sub-processes was further decomposed into the specific service offerings to the customer.
The next step is to link these service offerings to the components in the Technical Services Catalog – the IT facing view of the catalog.  First we identified the underlying technical services that comprise that service. For example, an application such as time reporting would align to the Payroll portion of the Hire to Retire services.  The application itself, a technical catalog item, is made up of configuration items; cost-able components such as servers, storage, databases, etc. within the IT space.

These tasks will take some time involving data gathering, meetings with the delivery managers and customer account managers. It may take some research and some innovative thinking to determine the appropriate alignment for each of the technical services to the business services.  Once this linkage has been defined the next step is to determine the costs and prices.

How much does it cost? – Linking the costs to the services
The challenge from the customer wasn’t just what the service is but why is it so expensive. They want real transparency into what the charge will be.  Even if there is not a charge back method in place, it is important that the business decision makers have the information they need to make economic decisions about IT.
The recommended approach is a three step process of mapping the Cost, setting the appropriate Price and then showing the business the economic impact of their IT services through the Charge.  Each step has its own tasks and challenges. 

Once you have gathered detail cost data and identified the key metrics to allocate each of the costs you can begin to map the cost flows from the IT cost centers to the Technical Services and then to the Business Services.  Developing the appropriate mapping involves many meetings with the key stakeholders, the IT supervisors and managers of each of the technical services. The results of this exercise are a detail cost flow diagram and a clear understanding of the costs associated with each of the services.  We were able to assign costs to each of the applications that consisted of the applications support and maintenance staff, the costs for hardware and software that host the application, their portion of the operations and management overhead, and finally any allocated costs.

Once the costs are well understood, then IT management can turn to pricing the services.  This involves understanding potential demand changes and some strategic decisions: What provision should be built into the pricing for technology refresh and keeping abreast of new technologies? Should early adopters be penalized with the full cost of a new service or should these be priced under cost initially to encourage their use?  Conversely, should obsolete technologies be penalized to encourage migration to new platforms?  What risk premium, if any, should be built into the prices to cover potential demand swings?  Where is consumption based pricing appropriate as opposed to a fixed price or allocation?  There are no right answers to these questions – they depend on each organization’s situation.

The last step in the chain is to implement a charging methodology.  Potential tax impacts and intercompany policies also have to be considered.  Any swing in the charges from one year to the next need to be fully understood and justifiable.  Where a direct charge or allocation is not desirable, a shadow or “show back” charging methodology can be employed. This also is often used for the first year of a new charge back approach to assess the impact and give the customer time to adapt and budget accordingly.

What can the consumer expect? – Service Level Management
The third leg of the process is to ensure delivery of the services through good service management processes.  This is especially critical where one or more outsourcing vendors are involved.  We will cover this in a future column...

I want to express my thanks to John McCord for his contribution to this column.  John has a wealth of IT Cost Management experience and we are currently working together with a global client to further develop their Service Catalog and Financial Management solution.

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