By Matt Dando, Director, Strategic Business Value Consulting at Serviceware
In today’s ever-accelerating digital era, and as we recover from a global pandemic, digital transformation has stepped more firmly into the limelight. Over the last 18 months, digital initiatives have accelerated, with investment in the cloud also increasing dramatically. Digitalisation is arming CFOs and CIOs with data, but understanding what to do with it can be overwhelming, especially when battling to manage cost data from the various vendors associated with both cloud and existing on-premises investments.
With pressure around sustainability acting as another catalyst for cloud adoption, never has there been a greater need for businesses to have a complete, detailed and transparent view of all IT costs. In fact, now is the time for businesses to ensure that they are managing IT costs effectively – not just in terms of cutting, but also optimising, investments, and reinvesting in the tools and technologies that can and will enable them to keep up with the wider business strategy. Luckily, there are 10 simple steps that businesses can follow in order to ensure a comprehensive, detailed and streamlined control over all IT costs.
Step 1: Building a comprehensive IT service catalogue
The starting point for IT cost control is the creation of an IT service catalogue. This catalogue outlines individual IT services, information about their purpose, location and costs, to create a detailed overview. Having a clear and complete definition creates standards for available services and bridges the gap between different departments.
Step 2: Effectively monitoring IT costs
One of the most important tools for the efficient tracking of IT costs is the control of the value chain, from the smallest cost units to finished business units. With the help of service catalogues, benchmarks, the use of IT Financial Management (ITFM) or what is often referred to as Technology Business Management (TBM) solutions, comprehensive access to this data can be guaranteed, creating a ‘cost-to-service flow’ that identifies and controls the availability of IT costs.
Step 3: Assessing IT budget management
Even with perfect transparency of IT costs, there are different approaches to allocating IT budget – centralised, decentralised and iterative. With a centralised approach, the budget is determined in advance and distributed to operating cost centres and projects in a top-down process, allowing for easy, tight budget allocation. With this approach, however, there is the risk of overlooking projects that offer potential growth opportunities. With the decentralised approach, the process is reversed. Operating costs are precisely calculated before budgeting and projects are determined. The downside is that budget demands might exceed available resources.
Finally, the iterative approach tries to unify both methods. Set budgets, overhead and prospective projects are put together to make a detailed assessment of the most viable course of action. Although the most lucrative approach, it also requires the most resources. None of these approaches are necessarily superior. Instead, it depends on the available resources, and the enterprise’s structural organisation.
Step 4: Managing IT budget for growth
Before allocating IT budget, it is important to define costs into two categories: ‘run’ and ‘grow’ costs. ‘Run’ costs usually include operating costs, while ‘grow’ costs refer to all services and products that are intended to change, transform or expand the business. Benchmarks and standard definitions can help with this categorisation, but do not necessarily have to be followed, as long as cost allocation remains consistent. When definitions have been clearly determined and projects assigned, the IT budget needs to be allocated and decisions need to be made on how to split the budget. Whilst a split of 70% run/30% grow is the norm across most enterprises, there is no one-size-fits-all approach, and decisions will rely on varying factors such as availability of resources and the goals of the enterprise as a whole.
Step 5: Keeping a positive gross profit margin
By following the steps above, organisations can achieve complete transparency with regards to which products and services are offered, where IT costs stem from, and where budgets are allocated. This makes it easier to analyse how much of the IT budget is being used and where costs lead to profits and losses. If the profit margin is positive, the controlling processes can be further optimised, and, if the profit margin is negative, appropriate, or timely, corrective measures can be initiated.
Step 6: Staying tax compliant
One additional important factor in comprehensive IT cost control is tax compliance. The more the enterprise of a company operates internationally, the more relevant it is to stay on top of varying international tax regulations. IT products and services that are marketed abroad are subject to country-specific tax laws and, to ensure that they are adhered to without errors, it is necessary to provide correct transfer price documentation. This in turn depends on three factors:
- Transparent analysis and calculation of IT services based on the value chain
- Evaluation of the services used and the associated billing processes
- Access to the management of service contracts between providers and consumers as the legal basis for IT services.
By achieving the transparency enabled by the previous steps, it is possible to demonstrate international tax compliance.
Step 7: Benchmarking IT service pricing
The first step in pricing IT services is to collect benchmark data. These can be researched or determined using existing ITFM solutions that are able to obtain them automatically from different – interconnected – databases. Next, a unit cost calculation is necessary in order to define exactly and effectively what individual IT services – and their preliminary products – cost. This enables businesses to easily compare internal unit cost calculations with the benchmarks and competitor prices, before making decisions about pricing.
Step 8: Providing factual cross-driver analysis
A properly modelled value chain makes it clear which IT services or associated preliminary products and cost centres incur the greatest costs and why. This analysis allows for concise adjustment to expenditure and helps to avoid misunderstandings about cost drivers – for example, the importance of infrastructure on the generation of IT costs. Then, strategies can be developed to reduce IT costs effectively and determine more careful use of expensive resources.
Step 9: Accounting and invoicing IT costs
IT cost control through the value chain enables efficient usage-based billing and invoicing of IT services and products. If IT costs are visualised transparently, they can easily be assigned to IT customers. This increases the transparency of the billing process, and provides opportunities to analyse the value of IT in more detail. There are two options for informing managers and users about their consumption: either through the showback process – highlighting the costs generated and how they are incurred – or through the chargeback process, in which costs incurred are sent directly to customers and subcontractors.
Step 10: Managing supply and demand
The manual nature of Excel spreadsheets poses a risk to data integrity and should therefore be avoided, as they are impossible to keep up to date all the time and require significant effort to maintain. A holistic analysis and greater cost transparency results in a larger, more detailed overall picture of IT service consumption, which allows conclusions to be drawn in a timely manner to enable the optimisation of supply and demand for IT services in various business areas.
Optimising and maintaining IT cost control
Following the above steps will ultimately enable businesses to reach new levels of efficiency and maturity – and, more importantly, create a secure, transparent, and sustainable IT cost control environment. Budgets can be optimally utilised, IT costs can be cut and overall productivity significantly boosted. However, businesses that ignore this advice will be severely hindered if they do not stay on top of the ever-changing conditions of the current market landscape.
