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IT Cost Accounting: Measuring the cost of IT services at the point of delivery

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IT Cost Accounting: Measuring the cost of IT services at the point of delivery In these days of economic downturn, visibility into IT Operational costs has become increasingly important for Enterprises
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IT Cost Accounting: Measuring the cost of IT services at the point of delivery In these days of economic downturn, visibility into IT Operational costs has become increasingly important for Enterprises due to the proliferation of IT into their Business. This visibility is essential in order to establish control over the ever increasing IT expenses, caused by unchecked IT sprawl. Also, understanding the cost of IT, at the point of delivery, lays the foundation for many key themes of today - like Service valuation, Green IT, economic analysis of IT projects etc. This whitepaper proposes a cost accounting oriented approach to allocate a cost to an based on the premise that s are the IT face to Business, and use the Cost as a basis to derive the cost of IT delivery to Business. About the Authors Praitida Chowdhury Praitida is a Solution Manager with Global Consulting Practice of TCS. He has over 23 years of experience in diverse walks of IT delivery and automation management problem solving. He has executed a number of consulting engagements for clients in US, Canada, Latin America, South Africa and Asia. His interests include Enterprise Architecture, IT Transformation and Portfolio rationalization. He holds a Bachelor of Technology in Computer science from Indian Institute of Technology, Kharagpur, India. Abhijit Pyne Abhijit is a Solution Manager with TCS Global Consulting Practice. He has 14 years of experience in the area of IT Consulting. His area of interest include IT Cost & Charge back, Shared Services, Outsourcing, IT Strategy and BPR. He served his clients across North America, Europe, United Kingdom and Latin America. Abhijit holds a MBA from Indian Institute of Management Calcutta, India and a Bachelors Degree in Technology (Electrical) from Calcutta University, India. Kausik Mukherjee Kausik is a GCP Solution Manager with 12 years of industry experience. Kausik has consulting experiences primarily in the areas of Enterprise Architecture - adoption & assessment, Technical Architecture Creation, Strategic IT & Technology Planning and Enterprise Transformation. Kausik has worked with major enterprises across North and Ibero America in Government, Banking, Financial, Insurance, Retail and Manufacturing domain. He holds a Post Graduate Diploma in Business Management from Indian Institute of Social Welfare and Business Management, India and Bachelors Degree In Science from University of Calcutta, India. 1 Table of Contents 1. Introduction 3 2. Objective 4 3. Background 5 4. IT Cost Accounting Framework 6 5. Conclusion 14 2 Introduction Enterprises need to have a clear financial visibility into its operations as it is said, You can t control what you don t know. In these days of economic downturn, it has regained importance, as enterprises are frantically searching ways for reducing their expenses. This whitepaper is about discovering IT Cost at the point of IT service delivery. The intention is to change the IT Cost from General and Administrative (G&A) of Indirect Cost category to Direct Cost category in tune with Cost of Goods Sold (COGS) concept. This will enable linking of IT cost directly to the cost of products and services offered by business units and thus improve visibility of IT cost to business. This is a necessary precondition for implementing recent IT management concepts like chargeback and transforming IT from cost centers to profit center. Concepts discussed in this whitepaper will also play a key role in green computing and carbon credit accounting as far as energy consumption by IT contributes to the price of a particular product and service offered by organizations. Information Technology, an integral part of today s dynamic business, and delivered through their sprawling Data Centers, pose a challenge to enterprises in this respect. It is frequently observed that IT continues to drain financial resources without providing any insight as to its consumption. This is partially due to intangible nature of IT and partially due to lack of standard IT accounting frameworks. Having a clear understanding of where & how IT costs are consumed helps not only identify areas of cost inefficiencies, but also improves accuracy of financial decisions, like Budgeting, Project prioritization, Product & Service Pricing. In addition, insight into energy expenditure of IT is the basic necessary step for enterprises on a Green IT mission, in reducing their Carbon footprint. 3 Objective In most of the organizations IT budgets are part of Business Unit s operation budget. In other organizations IT budget is handled centrally at the corporate level. In our experience we often sensed following skepticism about how the IT budget is being spent by the IT department. Business Managers are looking for IT cost transparency. Product or Servicers should correctly reflect the IT service cost. Cost of IT services at the point of service delivery is unknown and business owners are skeptical if the IT budget dollars from one unit is being used to subsidize other units IT. - A business unit that provides subsidy to other units looses either on the financial margin or suffers from the competitions on account of high price. - A business unit that receives subsidy is able do more with less by unfairly using someone else s budget dollars. Every business units finds that there are various ongoing IT projects in the name of improving Flexibility or Reliability or Availability or Reducing Cost. But the direct business benefit could not be ascertained very clearly. Business managers are not sure if IT projects executed in the name Optimizing IT Cost (e.g. Server Virtualization or Retiring of Mainframe from the IT portfolio) would increase the profitability margin by few hundred basis points or not. IT managers would be clueless and would hate to face such questions from business managers. Though IT Managers would be able to show a business case presentation but the business managers won t get the answer he/she is looking for. Only if the IT service cost at the point of delivery is known, business managers would be able to ascertain the correct impact of these IT projects on the business. Often business expectations from IT become unrealistic. Business manager will ask for high availability, high throughput or very ambitious SLAs. IT manages would be able to manage such expectations objectively if IT Service Cost at the point of service delivery is known and incremental impact of such demand can be shown to the business managers. s are the IT face of business and most of the IT services are delivered around the s. IT departments also manage its affairs around its application portfolio. To manage the IT Cost and expectation around the IT Cost, IT Managers must know the operating cost of s. What is needed is a framework to discover the application operating cost, which would help IT Managers and CIO s manage the IT cost transparently. 4 Background This idea stemmed from a real life project, when the CIO of a large Latin American Government Organization expressed his despair with regards to visibility of IT costs to the business departments. The key concerns of the CIO of the enterprise were increasing IT Operating Cost. We explored the IT cost related practices in the industry and found that there is no available methodology to identify and analyze the cost of IT service at the intersection of business and IT which would give a clear indication to business the about cost of IT services at the point it is delivered by IT department and consumed by the business department. Using the IT cost accounting ideas described above, a framework was developed and costs of the s were derived. In the following sections we present an overview of the IT cost accounting framework aimed at arriving at the operating cost of IT to business. 5 IT Cost Accounting Framework The framework, which is of conceptual in nature consists of some preliminary, interdependent concepts, an approach and certain good practices, or do s & don ts. Some preliminary concepts Cost Model is the expression of an s Operating Cost in terms of cost categories & sub categories. The final cost is obtained through roll up of these constituent costs. An example is shown in Figure 1. Cost Categories Operating Cost People Cost FTE / Internal Contractor / External Senior Mgmt IT Staff Service & Support App Dev. & Maint. H/W, N/W, Storage People - Cost Objects Technology Cost Rental COTS Facilities IT Asset - Cost Objects Energy WAN Bandwidth Figure 1: An Cost Model Cost categories provide a means to describe the cost profile of an application and are derived from the expenditure under Cost Heads of the IT Organization. Two broad category could be thought of People & Technology, with sub categorization as shown in Figure 1. There is no fixed rule or guideline for these categorization schemes, which depends only on convenience & context, and other schemes are possible e.g. Hardware, Software and People. Nowadays, it is desirable to include Energy as a Cost category, which can lead to useful insights into Green IT opportunities. 6 Cost Heads are categories under which the IT organization accounts for their operational expenses, typically incurred through payment to vendors and Utility Agencies. Some example Cost heads are shown in Figure 2. Hardware Software (COTS) Network Bandwidth Facilities Services Energy Real Estate People (Salary) Servers Desktops Printers Storage Network Enterprise Apps App Servers Databases O/S Office Apps WAN LAN UPS AC Electricals Camera Access Control False Flooring Hardware Support Network Support COTS Support ADM Quality Data Center Location Data Center Location Data Center Staff Contractual Staff Senior Management Messaging / Collaboration Fire Prevention Figure 2: Some Typical Cost Heads Cost Objects are components of the applications deployment environment, the cost of which are aggregated under the Cost heads. These provide a mechanism to relate the with the operating expenses. Servers, Network equipments, People Salary etc. could be typical examples of Cost objects. Figure 3 depicts the deployment context of an application showing its relationship with different cost objects in its environment. Enterprise People (Sr. Management) Business Units Data Center 1 People (Business) Office Equipments People (Skill) 1 1 Server 1 Server COTS 1 COTS 2 COTS 1 COTS 2 N/W Bandwidth Storage GBs Energy Facilities Server 1 Data Center 2 Server 1 2 Real Estate People (Skill) N/W Bandwidth COTS 1 COTS 2 4 COTS 1 COTS 2 Storage GBs Energy Facilities Real Estate Figure 3: s and their deployment contexts 7 Cost Units are the basic elements of cost objects to which a cost figure can be assigned. The quantity of cost units determine the cost of the cost objects, which in turn contributes to the cost of applications using them. Unit costs (of Cost Units) is the cost of a single Cost Unit. These can be estimated from the deployment architecture (e.g. number of Servers / s / COTS / LAN Ports, amount of Disk space etc.) and costs under the Cost Heads. For example Dollar per or Dollar per GB Calculation of s Cost s Cost is computed from its cost categories, as in Figure 1. However, the following diagram, Figure 4, ties up the concepts explained above and depicts the chain of derivation of application costs. It shows how the costs under Cost Heads can be apportioned to Cost Objects, using certain logical allocation criteria based on the Cost Drivers. It finally links the category wise costs to application s usage of Cost Units, summing up to the s Cost. Cost Heads Cost Drivers Cost Objects Cost Units Unit Costs wise Lookup Server Instaled s Server Cost Per Energy Bill HARDWARE Facility Electricals Facility CCTV / Fire Prev. Equipment Power Rating Equipment Volume (Cu.M) Equipments (Server)* * (Server) Energy Cost Per Facility Cost Per *Note: 1. For Storage - calculation on basis of GB of Storage 2. For NW - calculation on basis of MBPS Bandwidth Cost Per No. of s Used Cost Categories SOFTWARE Storage SW (COTS) Installed GBs of Storage Total SW (COTS) Instances Per GB of Storage COTS instance Per GB of Storage COTS instance Cost Per GB Cost Per SW (COTS) Instance GBs Used No. of COTS instances Used Cost PEOPLE Data Center Staff Salary Senior Management Salary GB of Storage No. of Servers No. of Supervised Staff for Supporting Per GB of Storage Server s Per GB of Storage s Staff Salary Per GB Staff Salary Per Senior Mgmt Salary per GBs Used No. of s Used wise look up Figure 4: s cost derivation chain 8 For deriving the cost of an application, the Cost Units / Cost objects need to be unambiguously associated with the application. But, in the real-world, IT infrastructure is typically shared and allocating Cost Objects to application need to consider various sharing scenarios, as shown in Figure 5. Cost Object Cost Object A B Cost Object Cost Object Cost Object Cost Object Cost Object Cost Object C D Figure 5: Cost apportionment scenarios (cost fan-in & fan-out) 9 These various scenarios require apportionment of the Cost Units (of the Cost Objects) to applications and lead to cost fan-in and/or cost fan-out. They are addressed as under Scenario Cost Apportionment technique Example A. One Cost object used exclusively by carries the full cost of the cost object installed in 4 Server. Considering only H/W Cost; the Cost = 4 x Cost per B. One cost object is shared by many s C. Many cost objects are exclusively used by an Cost Units are divided among the applications By exact usage of an application e.g. No. of s allocated. Equally Using parameters e.g. Database Volumes, Business Criticality, No. of tickets etc. as appropriate to context carries the sum of the Cost Units 1. A & B share the 4 server. A & B are allotted 3 & 1 s respectively. Their H/W Costs are - A= 3 x Cost per ; B = 1x Cost per ; 2. A & B share an Oracle instance, their DB volumes are 400 GB & 150 GB respectively. Implies A uses 400/( ) = 0.73 and B uses 150/( ) = 0.27 of the Oracle Instance. Their S/W Costs are A= 0.73 x Cost Oracle Instance; B = 0.27 x Cost Oracle Instance; Also, it may be mentioned that their Storage costs would be A = 400 x Cost per GB; B = 150 x Cost per GB; installed in 4 Server, uses an O racle instance in the same server and uses 500 GB of Storage. Then Cost = H/W Maint. Cost + Storage Maint. Cost + S/W Maint. Cost = 4 x Cost Per x Cost per GB + 1 x Cost Per Oracle Instance D. Many to many relationship between cost objects and s Can be broken down into a combination of B & C. Each carries the sum of Cost units used by it exclusively and the apportioned share of cost units shared with other s. Extending the example of s A & B above, assuming A also uses an MS-SQL instance of 200 GB size in a 2 server. Thus, their Costs are A = (3 + 2) x Cost per + ( ) x Cost per GB x Cost per Oracle Instance + 1 x Cost per MS-SQL Instance B = 1 x Cost per x Cost per GB x Cost per Oracle Instance 10 The Approach for IT Cost Accounting With these concepts in place, the IT cost accounting approach, as depicted in Figure 6 is easy to explain. Cost Units S/w Instance (COTS) Disk Space Deployment Information Cost Unit Statistics 1 to Cost Unit Allocation (Cost Fan - In/Out Logic) 3 4 Wise Cost Unit Statistics Cost Heads H/W COTS 2 Unit Costs 5 Cost Cost Slicing & Dicing Total (Cost Heads) = Total ( Costs) Figure 6: An IT Cost Accounting Approach for Cost Step 1: The Statistical profile of Cost Objects and Cost Units is obtained from the deployment information. Step 2: Unit costs are derived from the cost heads using statistics derived as above in Step 1, making use of Cost Drivers, as in Figure 4. Step 3: Cost units are allocated to s, making use of deployment context as in Figure 3, apportioning & aggregating cost units as in Figure 5. Step 4: wise cost unit counts are formed Step 5: Operating cost is obtained via the cost model, as summation of its cost constituents, as shown in Figure 4. This way, operating costs for all the applications can be computed. This would facilitate slicing and dicing of the operating costs, throwing light on applications / areas of greatest cost inefficiencies. Preventing inconsistencies Good practices to follow As in any accounting situation, the input cost should balance against the output cost. That is, the sum total of cost heads considered should equal total cost of all applications considered. Any violation, which indicates incorrectness of results, can be prevented if the following principles are consistently observed Being specific with respect to the following scope items - the cost heads under consideration - the deployment architecture components under consideration - the applications under consideration 11 Taking care so that a cost unit is not allocated more than once to an application. Ensuring the property of the cost object apportionment logic that the sum of the distributed shares should equal the undivided original Ensuring that the cost objects / cost units used for application cost calculation are the same as those used for unit cost calculation. The cost heads, cost objects & units, the deployment architecture and the application costs derived should pertain to the same time period, otherwise inconsistent results would follow. Carefully note down all source of data, apportionment logic and assumptions made. Implementation Considerations The utility of IT Cost Accounting will not be realized unless it is successfully put into practice. However, it is a non trivial task, given the intangible nature of IT and the typical organizational dynamics. The aim of this exercise is not to arrive at the accurate cost of applications to business to the decimals but give a clear visibility of the extent of expenses in terms of people, asset and technology that the enterprise is bearing. This exercise will help the CIO and IT Decision makers to take faster and better decisions on IT optimization and make new investments which would justify IT cost to the greater organization. To practice this exercise, some typical challenges faced are Challenge Example Absence or inaccessibility of information on operational costs (e.g.) Missing contract value with outsourcing partners, salary cost of FTE Unavailability of deployment information to determine the cost objects as per the cost heads and applications Lack of information on distribution of COTS instance on servers, or mapping of COTS to applications Validity of data in terms of expenses Old or not up to date data on operational cost Unwillingness of siloed business units to divulge information Obtaining salary data of FTE from HR. Obtaining count of people deployed to manage legacy applications, ERP etc Conflicting information arising from various views into deployment architecture One document describing A as Unix based and another document reporting A as a mainframe application. Lack of standardization across business units on the cost heads Lack of consensus on cost apportionment of resources shared across business units Non standard system architecture creates challenge for cost apportionment logic needs specific expertise. Departments reporting Hardware / COTS /application maintenance costs separately or clubbing them differently. Departments unwilling to accept apportionment of Server s shared by their applications citing unacceptability of apportionment logic. Typically obsolete systems. 12 Though there is no fit-for-all solutions, but there are three golden rules which can act as safeguards in difficult situations Be explicit on the scope, cost figures taken and cost model followed. Note down all the assumptions made in arriving at the calculations or cost apportionment logic. Also note down all the source of data. Secure the buy-in of key stakeholders before embarking on the exercise Assessment of the IT costs should not stop at being a one time affair. It is essential to institutionalize the framework through a process and repeat the same p
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