Cost Modeling Best Practices for Practitioners I dont have all the - - PowerPoint PPT Presentation

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Cost Modeling Best Practices for Practitioners I dont have all the - - PowerPoint PPT Presentation

Mar 04, 2023 300 likes •713 views

Cost Modeling Best Practices for Practitioners I dont have all the inputs. How do I keep the model simple? 3 What can I expect once transparency is achieved? 4 After this session, youll be able to: Clearly

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Cost Modeling Best Practices for Practitioners

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“I don’t have all the inputs.”

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3

“How do I keep the model simple?”

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4

“What can I expect once transparency is achieved?”

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After this session, you’ll be able to:

  • Clearly articulate the value of cost modeling
  • Build and manage a cost model
  • Understand outputs and outcomes of cost modeling
  • Take your organization on a successful transparency journey

5 Elevate IT. Ignite Possibility.

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Defining Cost Modeling

6 Elevate IT. Ignite Possibility.

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Visibility Into Key Spend Viewpoints

GL ACCOUNTS SERVICES CONSUMERS & APPLICATIONS BUSINESS CAPABILITIES

  • GL & AP Data
  • Cost Center / Account
  • Compute, Servers, Storage,

AD, Desktops, Laptops, etc.

  • Consumers (100%)
  • Application or End User
  • Apps grouped and allocated

to business services

  • Business Service Metrics

Elevate IT. Ignite Possibility.

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The Value of Cost Modeling

  • Aligns IT spend to business value
  • Enables the CIO to transition from defending the budget to gaining support for new

initiatives

  • Elevates IT from a cost center to a business partner by developing trust
  • Provides several dimensions of TCO (service, consumer, application, business capability),

with each dimension providing insights to key stakeholders

  • Empowers practitioners to fully analyze, communicate, and justify the cost of services

they deliver to the overall organization

8 Elevate IT. Ignite Possibility.

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Building & Managing Cost Models

9

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Key Capabilities

  • Create multi-dimensional views
  • Include budget, actuals, and forecast
  • Trace forward and backward

Elevate IT. Ignite Possibility.

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Elevate IT. Ignite Possibility. 11

Key Challenges

  • Iterate – Limit initial scope: define and

refine, address data gaps over time

  • Limit Complexity
  • Service Catalog Size – Cost & measure
  • Avoid Precision Traps
  • “Directionally Correct”
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Tiered & Layered Model

12 Elevate IT. Ignite Possibility.

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The Tiered Model & Allocation Methodologies

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Run IT like a business

IT pricing

Flat rate tiered negotiated IT domain cost allocation High-level allocation – hybrid chargeback - showback Subscription fee Measured/ resource usage Direct cost

Challenge of external market comparison Challenge of choice Challenge of fairness Challenge of accountability Operational service levels Service contract Governance Service level

  • bjectives
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Cost Model: Budget, Actuals, Forecast

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Budget Service Cost Model Cost of Services (Forecast) Actuals Forecast Cost of Services (Budget) Cost of Services (Actuals)

Elevate IT. Ignite Possibility.

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Building & Managing Cost Models:

Service Catalog Impact

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ITSM & ITFM

ITSM

IT Service Management

ITFM

IT Financial Management

ITFM Focus:

  • Service Costing & TCO
  • Transparency
  • Enable Cost Allocation,

Chargeback or Showback

  • Benchmarking
  • Application Rationalization

ITSM Focus:

  • Service Strategy
  • Service Design
  • Service Transition
  • Service Operation
  • Continual Service

Improvement

IT Service Catalog

Elevate IT. Ignite Possibility.

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Collaboration Between IT & Finance Required

  • Price & Measure - Remember that for every IT Service you define, you

will need to be able to map costs to it and choose a reasonable metric to develop rates and bill consumers

  • Verify Finance can measure (or reasonably allocate) costs
  • Verify IT can measure the consumption of the service
  • Both are needed to produce cost of service, set rates, and bill consumers

Elevate IT. Ignite Possibility. 17

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Service Catalogs & Models: Real World Examples

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Client 1 Client 2 Client 3 Client 4 IT Spend $ $100M $385M $190M $400M Model Type Decentralized Centralized Centralized Centralized # of Services 76 50 100 450 # of Budget Lines <2,000 <2,000 <1,000 1,800 Steps in Cost Model ~100 ~25 ~50 ~100 General Methodology Double Step Down Layered Layered Layered Business Functions

  • Budget Collection
  • Demand Forecast
  • Service Costing
  • Rate Setting
  • Invoice
  • Actual Service

Cost/True-Up

  • Budget Collection
  • Service Costing
  • Rate Setting
  • Invoice
  • Actual Service

Cost/True-Up

  • Invoice
  • Actual Service

Cost/True-Up

  • Budget Collection
  • Demand Forecast
  • Service Costing
  • Rate Setting
  • Invoice
  • Actual Service Cost/

True-up

Elevate IT. Ignite Possibility.

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Building & Managing Cost Models:

Managing Complexity

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What Drives Complexity?

  • Precision traps
  • Technical accuracy
  • Financial accuracy
  • Granularity
  • Different audiences/different perspectives
  • Data availability & quality

Elevate IT. Ignite Possibility.

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The Sweet Spot

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Simplicity Complexity

  • Easier to digest
  • More actionable
  • Management gravitates to simplicity
  • Accuracy drives up complexity; lack of

accuracy can damage credibility

  • Poor data quality can drive complexity
  • Finance and IT gravitate to complexity

The Sweet Spot

Elevate IT. Ignite Possibility.

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Cost Modeling Outcomes

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Elevate IT. Ignite Possibility.

Tangible Outcomes & Use Cases

  • What-If Analysis
  • Control Costs and Consumption
  • Valuable Benchmarking
  • Empowered Accountability
  • Multi-Dimensional Views
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Multi-Dimensional Views

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View Services Consumer Application Business Capability

Allocates GL costs to IT Service Allocates service costs to consumers based on usage Allocates service costs to Applications based on usage Total Application costs are grouped and allocated to Business Services

Example

  • Compute power
  • Servers
  • Storage
  • Application Development
  • Desktop/Laptop
  • End User
  • Business Partner
  • Cost Center
  • Department
  • On premises
  • Hosting Applications
  • Cloud Hosting
  • Storage
  • Marketing
  • Sales
  • Billing

Answers

  • How much are we spending to deliver

each service?

  • What items and services are in my IT

bill?

  • What are our unit costs and how do

they compare?

  • What costs and services are included in

the unit rate?

  • Which business partners

consume IT resources? (% and $)

  • Why is my IT bill going up?
  • What do I get for my IT

expenditure?

  • How do my expenses compare to
  • ther business partners?
  • How/where can I impact my

budget and corporate profits?

  • What is the total cost of my

applications?

  • How much are we spending

internally vs hosted?

  • What are the technology costs

associated with enabling my Business Capabilities ?

Stakeholder

 Executives  Business Partners  IT  IT  Executives  CIO  IT  Executives  CIO  IT  Executives  CIO  Business Partners

The Value/Payoff (the data provided enables):

  • Understand the cost of services and

components

  • Understand and drive down unit rates
  • Benchmark against third-parties and

peers

  • Insight into which business

partners benefit from IT

  • Transparent view of consumption

rates

  • Helps show value
  • Application Rationalization

exercises

  • Business Service Metrics
  • Align new investments more directly to

business functions Elevate IT. Ignite Possibility.

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The Transparency Journey:

Socializing & Defending Your Model

25

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3 Phases of Transparency

Challenge Phase:

  • Educate – Be prepared to educate your consumer on the insights the data provides.
  • Defend - Be prepared to defend your model – this will require accuracy & detail.

Black Hole Challenge Phase Enabled Decision- Making

Elevate IT. Ignite Possibility.

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New Transparency: Challenge Phase Questions

  • Embracing the “Aha Moments”
  • Has the organization clearly defined and

communicated components used to calculate unit rates, consumption rates, service costs, etc.?

  • What are the specific calculations being

used?

  • What is included/excluded?
  • Does data come from the same source?
  • Which cost groups are associated to

costs?

  • How do general items (such as
  • verhead) impact costs?
  • What assumptions are being made? Are they

accurate and agreed upon?

  • What pieces of data are missing or

incomplete?

  • What data collection processes need

improvement?

  • Are there duplicated services and products?

27 Elevate IT. Ignite Possibility.

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Use Case

28 Elevate IT. Ignite Possibility.

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Use Case

Elevate IT. Ignite Possibility.

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Use Case

30 Elevate IT. Ignite Possibility.

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Harnessing the Power of Cost Modeling

31

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Building Trust

  • Superior level of detail
  • Thorough answers
  • Rapid response

Elevate IT. Ignite Possibility.

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Stay Focused on Value & Outcomes

  • Do stakeholders understand their data?
  • Does it enable impactful decision making?
  • Has it improved your relationship with the consumer?
  • Do consumers value IT and what the services provides?

Elevate IT. Ignite Possibility.

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Thank You

34

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Appendix

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Cost Model Allocation Examples

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Source Object Target Objects Quality Driver(s) Proxy Driver(s) Service Desk Security Desktop/Laptop E-mail Server Database More… Incident Counts % of Costs in Target Objects Data Center Server (Windows) Server (Unix) Mainframe Compute Storage Tape Drives More… Floor Space Floor Tiles Power/Cooling % of Costs in Target Objects

Elevate IT. Ignite Possibility.

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Cost Model Allocation Examples

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Source Object Target Objects Quality Driver(s) Proxy Driver(s) Database – Labor

  • Includes all salary,

benefits, and other staff- related costs; and department manager

Database – Oracle Database – DB2 Database – SQL Server More… Time tracking data. Estimated % split of staff (DBAs) across each database platform Database – Non-labor

  • Includes hardware,

software, other non-labor

Database – Oracle Database – DB2 Database – SQL Server More… Direct mapping of line items is often required. Examples: Oracle License Cost DB2 License Cost Use Database - Labor allocations

Elevate IT. Ignite Possibility.

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Cost Model Allocation Examples

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Source Object Target Objects Quality Driver(s) Proxy Driver(s) Network – Back End (WAN) Physical Address/Locations Direct mapping of line items is often required Example: Mapping individual circuits to each address

  • Apportion all

backend network costs into Network – Local

  • Combine with Data

Center costs Network – Local (LAN) Desktop/Laptop Network Connectivity More… Device inventory (active only) Head count

Elevate IT. Ignite Possibility.

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Cost Model Allocation Examples

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Source Object Target Objects Quality Driver(s) Proxy Driver(s) Overhead

  • Office of the CIO
  • IT Service Management
  • Vendor Management
  • More…

All Objects % of Costs in Target Objects N/A

Elevate IT. Ignite Possibility.