When it comes to IT, the information gap around costs is kind of crazy. Even simple answers about IT costs are hard to get, hard to understand, and hard to believe.
So for years, IT leaders have searched for better ways to understand their IT costs. There are a lot of ways to go about it, but if you’re relying on manual reporting from corporate finance – well, you’re doing it wrong. [For full details on this and other bad approaches, download “5 Dead-End Approaches to IT Cost Analytics.”]
Sure, you know how much IT spends on some level. The metrics you get from finance’s general ledger like total spend, variance to budget, and spend by vendor are fine to have, you just can’t do much with that information. It’s not actionable, and is often slow to acquire, out of date, lacks granularity, is not defensible, or lacks IT context.
If there’s a variance in total spend vs. budget, what was the cause and where should you make adjustments to offset the variance with minimal service impact? If an application is retired, what portion of the cost will continue to be incurred due to fixed costs like depreciation or leases, or due to reliance on infrastructure that’s shared across other applications? You don’t really have any way of determining that.
Missing the “Why” and “How”
To answer these kinds of questions, IT leaders need to see cost and variance mapped to specific IT functions with accurate routing of costs from shared systems to the dependent elements that consume them. However, corporate finance does not track spend data to the necessary level of granularity. The primary objective of finance is to track and report on the financial position of the company, not necessarily to understand the “why” and “how” of all spend.
You lack the granularity that you really need. And even if the necessary granularity was available from finance, it would still lack the relevance needed for IT decision-making. The records managed by finance do not natively reflect the technology stacks, applications, or services delivered by IT.
Furthermore, finance typically does not know how costs of one area impact or roll up to another. For many shared functions or technologies that support multiple IT offerings, only a detailed technical understanding would provide enough context to accurately distribute that cost among the supported functions.
Lack of Capacity
The problems with this approach don’t stop there. The normal rhythm of business doesn’t leave time for finance to maintain highly granular, accurate mappings of IT costs. Every month, finance must move costs in the general ledger from one account to another account in order to zero out all central cost centers, one of which is IT. All costs incurred over the course of the month must be moved into the proper accounting books of the revenue-generating legal entities of the firm (the business units).
Also known as closing the books, this step ensures that all extraneous costs are associated with a business reason. During this process, there is little time available to evaluate every transaction for precise purpose and accurate, granular assignment to an IT function.
Arbitrary & Hard to Defend
In some organizations, IT costs are charged back to the various business units in the company via mechanisms known as allocations. These enable the cost of IT to be spread out among the various revenue-generating entities as a cost of doing business. Because finance lacks fidelity regarding IT costs and relative consumption by business unit, they have little choice but to resort to overly simplistic and possibly unfair approaches to allocating those costs to business units.
Consequently, from the business unit standpoint, IT looks like a bill or expense line item that has little connection with the rest of their business. These allocation approaches feel arbitrary and unjustified. None of them provide a fair or accurate representation of true IT cost.
Starting to get the picture? Good. So now you know: don’t do cost analytics like this. Be sure to download our new whitepaper for full details on this and other approaches you shouldn’t be trying. (And there is a better way! You can always get in touch with an Apptio expert to talk about how to best tackle your cost analytics challenges in an effective way.)
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