Published: November 17 2010, 09:18 AM | no comments
by Jan Christiansson

In a previous life I was helping forwarding, transportation, wholesale and cash management businesses to move from traditional costing methods to activity based. I always had to build and implement these models in business warehouse systems outside of the ERP system.

The past years I've seen similar requirements for IT, the need to move from a traditional allocation cost model to a more agile and flexible one. According to Forrester (Market Overview: IT Service Management Support Tools) the business is now demanding cost visibility at the same time as internal IT is evolving from technical silos to being a service provider.

So today my old headache is coming back, only this time it's even more complicated. In IT we're talking about Project Portfolios, Application Portfolios and Service Portfolios, Shared Services and Strategic Alignment, Business Service and IT Services, and Service Components. And to top it off we're trying to control all this with things like ITIL, Cobit and Six Sigma.

I only know one way of dealing with all this. Profit = Price - Cost. Follow the money.

I want to understand the cost of delivering a specific service to a specific customer, and therefore I need to map the underlying resources and assets in a business context.

My advice is to start with how IT operations is budgeted, like in the schematic model below:

This creates an IT Cost Model for how services are delivered and consumed internally and externally. And we can work from left to right; selling and buying (consuming) value/cost (bottom-up), or from right to left doing the Services budgets (top-down). This IT Cost Model is compatible with any activity based costing method, but also with more traditional cost accounting, and it will help you to prioritize projects and retire or restructure services, applications or whatever components needs attention. It will also enable fair recharging and internal pricing. All this simply because you will know what it costs to produce each individual component. And for those Lean Toyota fans out there, in a market economy who set the price? Profit = Price - Cost. Understanding cost is key.

To execute this IT Cost Model we usually need information from a number of different sources; PPM, ERP, HR, ITAM, Service Desks and all the excel spreadsheets used to do department, cost center and service budgets.

In addition to the systems mentioned, the key component is a robust and user friendly Service Catalog where we can manage requests, SLA's, contracts etc. but more importantly where the we can design, budget and recharge all these services back to the business, catering for both B2B services such as IT Consultancy and the Middleware Backbone, and B2C services such as Workplace, client applications and helpdesk.

I'm convinced that in order to execute Service Portfolio Management, you need to get the budgeting and recharging right. You need to follow the money.