I have been hearing and reading a lot lately of the need for better management of IT finances. As a result, many companies are looking for technology and processes to help them better account for IT expenditures. This typically entails allocating costs to business units, either through formal chargeback or billing policies, or via an informal "showback" reporting process.

There are two major categories of IT costs, including capital investments, and expenditures in maintenance, operations, systems, and equipment costs. Many of these are challenging for businesses to allocate. This is due to the lack of effective metrics - that is, a method to allocate costs based on consumption by specific business units.

There is a good reason for this in my experience. And that is for all the volumes of rich data we can derive from systems, there is no single metric in IT today that encompasses "IT usage."

We can collect metrics for system usage, storage volume, network traffic, and database size. But to a business manager or user, how do these relate to a specific service or even an application?

Typically, they do not. That is why I recommend that a company use a "suitable proxy" for the allocation of IT usage. This proxy will enable the IT provider the capability to pass on their capital and operational cost, plus a profit (if required), in an easy to "sell" package.

For example, do you do business with a company offering SaaS services such as customer relationship management? Typically, they offer their service by a monthly charge for each user. It is easy for the customer to understand the charge, and more important, it is relevant to the business. Imagine instead if the SaaS vendor charged by database tablespace size. For many business users, this metric would be irrelevant and not easily understood.

We can look at other businesses to see the "suitable proxy" model at work. The car rental business uses a time and distant metric for their charges. You rent a car by the day or week, and sometimes pay a mileage charge. The daily rental fee encompasses all the costs of the business - capital purchases, rents, operations, and maintenance, plus a profit. Also, these time and distance metrics are industry standards. You can easily compare rates from different providers.

But imagine a car rental business that charged a rate based on measurement of average engine RPMs. Measuring engine RPM may be a useful metric for use by an automotive technician, but it has nothing to do with the business of car rental.

The electric industry also uses a standardized metric for measuring usage and calculating billing. Take a look at your electric bill. You may see two charges. The first is for power supply, the charges for fuel used to produce electricity and the purchase of power. There is also the delivery system charges, for owning, operating, and maintaining the electric system. In either case, you are charged by a metric called a kilowatt hour. This standard metric - also known as a proxy - is used for both a fuel charge (regardless of source of power) and the entire electric grid.

In other words, the kilowatt hour is a single metric proxy for the entire electric power business. And according to US Government figures, this business totaled over $282 Billion in 2007 for major US investor owned electric utilities.

A suitable proxy can also be used for the internal calculation of business's service cost and profit, regardless of how the service is priced and sold to a customer. A great example of this is the airline industry.

Airlines use a metric called "available seat mile" (ASM) to measure their carrying capacity. This equals the number of seats multiplied by the number of miles flown. All airlines measure their cost by a related metric called "cost per available seat mile" (CASM). This is expressed in cents and is calculated by dividing operating costs by available seat miles.

Since CASM is an industry standard metric, it is easy to compare costs between carriers. Look at these costs per available seat mile from a study by MIT:

US Airways                   15.21
Delta                            14.27
American Airlines           13.03
AirTran                          9.57
Southwest                     9.09
JetBlue                         8.33

As a consumer, these costs and metrics mean nothing to you, as tickets are purchased based on the destination. But to the industry (and investors), a metric such as CASM enables a powerful comparison of cost and profitability. And is it a coincidence that the two highest cost carriers on this short list have both gone through Chapter 11 bankruptcy filings in recent years?

So if you are planning on allocating service costs to your enterprise consumers, think of using a suitable proxy. Remember, there is no kilowatt hour equivalent within IT. And don't worry about it if all you can do is utilize simple metrics such as headcount or number of workstations to allocate your service costs. These can be valuable proxies, especially if they are meaningful and relevant to your business, and match your allocation methodology.

We will explore some standard allocation methodologies in a future blog post. Until then, if you are looking for technology to help manage your IT finances, remember the terrific CA product and service offerings for CA Clarity PPM for IT Governance , CA IT Asset Manager, and CA Service Accounting.