As companies strive to maximize value and optimize service supply and demand, they are employing Lean IT principles. One way to understand and maximize value is to have a thorough understanding of IT finance, from cost structure to consumption. Armed with this knowledge, an IT executive could potentially answer some important questions about his company's business model:

What is my cost of doing business?

• Am I competitive with other businesses in my industry?
• Can I be price competitive with an external vendor, outsourcer, or service provider?
• Is the unit cost indicative of the value of the services?

To answer these questions and more, I have developed a six-step method by which IT can calculate its consumption in financial terms. 

1. Define the service in business terms

• 2. Calculate or estimate the service cost within a fiscal time period
• 3. Decide upon a unit of measure that is meaningful to the business and appropriate to the defined service
• 4. Collect the usage metrics for the service grouped by the appropriate organizational unit (business unit, cost center, department, user)
• 5. Divide the service cost by the total usage to calculate a unit cost or price
• 6. Multiply the unit cost by the usage metric attributable to each organizational unit to determine the discrete financial impact of service usage

Some of these steps your company may have already accomplished. For example, if you are currently employing a Service Catalog, then you should be in good shape for step one. These are not necessarily difficult tasks, however they are not trivial either. This method will take a good degree of thought. Time is also needed, not because of difficulty, but to smooth out usage and cost variations.

Any company attempting this exercise will be met with several challenges:

• The organization may not know their service definitions
• They may not have visibility into their costs, or they attempt to make their costing model too simple or too complicated
• They may attempt to use operational or performance metrics when they should be looking at usage metrics
• Technology sometimes gets in the way of any meaningful metric grouping. For example, it can be difficult to calculate network bandwidth usage attributable to an individual user with an IP address obtained via DHCP.

This is obviously a simplistic view of what could be a very intricate topic. Like any financial model which could be developed in a reasonable timeframe, you will need time to understand patterns in the numbers. For example, if you use "transaction count" as a usage metric, one month's worth of data will not provide you with a significant per unit price. You will need at least six months of data for any meaningful analysis.

What challenges do you have with IT financial management?