There are a lot of bad ways to do cost analytics. We covered one of them – relying on reports from corporate finance systems – in this article.
And because you loved it and there’s more where that came from, we’re at it again. The truth is, there are a lot of dead-end approaches you shouldn’t be trying. We’re just getting started!
So here are three more. Be sure to check out our whitepaper, “Detours on the Road to IT Cost Transparency” for more tips on this topic.
The Joys of Spreadsheet Analysis
With all the sophisticated tools available, you might reasonably assume people have lessened their reliance on spreadsheets to understand IT spend. And you’d be wrong.
In the absence of a system that performs cost analysis calculations automatically, cost allocation methodologies are improvised or invented on the fly. What is the go-to tool for ad hoc financial analysis? Spreadsheets. While convenient because the software and basic skills are readily available, relying on spreadsheets for IT cost analytics introduces some major challenges.
There’s often a compelling event for performing this analysis, say a mandate to cut costs or a question about how the cloud stacks up against in-house IT. Whatever the case, IT and finance staff spin up a usually tedious effort to develop a result via spreadsheets.
This usually involves developing a methodology, validating it with various stakeholders, collecting data, aggregating the data, correcting formatting and formula errors, more validation, building reports to summarize the data, and maybe some more validation and refinement. That is a complicated, expensive and non-repeatable process that requires a lot of discussion and manual effort, which makes the whole thing time-consuming and slow to deliver.
Finance or ERP Costing Platforms – Better, Right?
Many corporate finance organizations have developed mature approaches to costing various non-IT activities or services offered by their companies using the profitability and cost management modules provided by enterprise resource planning (ERP) vendors.
Some finance teams attempt to apply this costing muscle to IT. On the surface, this approach appears to be better: it includes actual costs, not estimates; it’s purpose-built for repeatable, automated costing with intelligent allocation logic; it automatically pulls in cost source data from ERP data sources.
Unfortunately, this approach, too, falls short.
As with other attempted solutions, the incorporation of appropriate IT operational data sources represents a major stumbling block for ERP costing platforms. ERP platforms are not natively structured to incorporate IT operational data such as a configuration management database, service catalog, service request, or monitoring data. The contortions required in the ERP platform to adopt such data often create frustrating limitations or usability problems.
Then there are issues with activity-based costing (ABC) for categorizing and calculating costs, which is common among finance teams in manufacturing and service delivery industries. It isn’t unreasonable to think it could work for IT costs, but ABC often struggles to cope with IT’s high rate of change and intangibility of IT offerings, yielding insufficient fidelity to support IT decision analytics. (You can read about these in more detail downloading this whitepaper.)
Yet perhaps the most significant inhibitor to using ERP costing platforms for cost analytics is the lack of IT domain knowledge, either from ERP vendors or internal system advocates, to efficiently adapt it to IT cost analytics. The problem is that this requires ERP experts to develop new domain knowledge about IT to construct a cost modeling approach that works for both finance and IT, with sufficient fidelity and defensibility to enable informed technology decisions. While not insurmountable, this learning curve is expensive and time-consuming.
A Consultant Should Do the Trick
In the absence of an internal IT cost analytics solution, many organizations turn to external consultants to help them get a handle on IT costs. These consultancies bring in skilled personnel with experience in understanding IT structures, flushing out hidden cost, and building a model that provides IT leaders with a big improvement in cost visibility. Some of these organizations even offer a benchmarking service that compares the calculated costs against similar industry peers.
So what’s the problem? This approach tends be very expensive. There’s the high compensation of the skilled consultants, the fact that the process is often completely manually driven by those skilled consultants, and the tying of IT cost analytics to larger IT transformation initiatives that can inadvertently inflate the scope and cost of the project.
If you aren’t bothered by cost, you might want to think about the fact that these consultant-driven IT cost analytics projects yield a view that is accurate for a limited period and then gets out-of-date. Most consultants do not deliver a solution that is independently repeatable by the IT organization without re-engaging the consultant in another costly project.
This means that the cost analysis is only updated every 18-36 months. In between, decisions are based on outdated information, there’s no quick way to measure the financial results of those decisions, and subsequent decisions do not benefit from visibility of any cost-basis changes.
This is not to say that consultants are inherently flawed. In fact, they are an unrivaled source of IT strategy, with the expertise and independence to help IT leaders recognize the need for and execute change. But wouldn’t your IT consultant budget be more wisely utilized if you could automate the cost analytics and focus your consultant engagements more on strategy, decisions, and action?
So, Then What?
IT decision agility that keeps pace with the business can only be achieved with repeatable, ongoing IT cost analytics. And ideally, you want this to occur in a system designed for this purpose or you can end up with quite a mess – or even worse, a really expensive mess.
Apptio has a tool purpose-built for IT cost analytics, designed specifically to support TBM practices. If you want more information, to talk with an expert, or see a demo of how you should be doing cost analytics, contact us.