Managing labor spend to plan requires a systematic analysis of financial and operational data and business unit consumption of applications.
With a significant percentage of IT costs driven by labor, IT finance and cost center owners have a vested interest in making informed IT staffing decisions—it’s one of their biggest levers to control IT spend. Avoiding headcount allocations that don’t align with business priorities is a surefire way to maximize IT spend value.
However, informed IT staffing decisions depend on defensible calculations of fully-burdened labor spend. And that’s difficult. Business stakeholders may be reluctant to trust any analysis that is too simplistic, and organizations can struggle to replicate a process that is too complicated.
Corporate Performance Management (CPM) tools produce forecasts at an account and cost pool level and focus on revenue, expenses, and income statement. This is not sufficient information for IT cost center owners to track labor.
Tracking variance at the internal and external labor cost pool level isn’t enough to make informed IT staffing decisions. A cost center owner isn’t tracking variance for an academic exercise—they want to act. But cost pool variance isn’t granular enough to show what action needs to be taken. Three areas that provide better granularity include:
1. Infrastructure engineering, maintenance, and operations
Run-the-business labor spend is fairly consistent when hiring plans are flat, while infrastructure variance is driven by operational changes or new initiatives. Use this data to close infrastructure variance by accelerating cloud migration initiatives and retiring legacy hardware.
2. Application and services support spend
An application reaching the end of its useable life generates more support tickets than a new app. However, a new app may have a rocky adoption path that drives support ticket volume. The number of tickets in each scenario may be different, the severity may vary, but each ticket has a cost and those costs drive up app/service TCO. Use these details to close application and services support variance by rationalizing duplicate application capabilities and retiring end-of-life applications.
3. Capitalized labor for projects spend
Project scope creep, or cumulative sunk costs for failing projects drive up capitalized labor. Without clear guidance from the project management office, failing project costs can continue to accumulate spend. This data can be used to close capitalized labor for projects spend variance by canceling failing projects.
IT cost center owners struggle to track the costs of dispersed headcount. Functionally cohesive but distributed teams (e.g., an organizationally flat application development group staffed globally) must budget for the fully burdened costs of IT labor—inclusive of regional differences in employee benefits. Baseline labor rates by employee type, role, and location allow cost center owners to make comparisons and take action.
The full “story” of labor spend is best told by combining fragmented data sources. GL entries in an ERP system shows spend, time tracking with human resource management solutions shows hours, and project labor alignments with a project portfolio management solution shows assignment. Informed IT staffing decisions flow from viewing all these data sources in one place, which provides for normalized spend, hours and project alignment.
Furthermore, in a shared services environment, fully burdened IT labor costs cannot be built off a simplistic rate card. A rate card for shared services must have consumption-based cost allocations and a flexible cost model. A homegrown spreadsheet could be jerry-rigged to do that, but good luck trying to keep it current when new actuals are being fed in from your Oracle, SAP, or other ERP system and a new organizational structure is uploaded from Workday, Epicor, or etc.
Monthly or quarterly business reviews (MBRs/QBRs) are a forum for making informed IT staffing decisions. Beginning at the account level (“Let’s review Account_2010_Employee Salaries”), alignment to business priorities flows from reviewing labor spend drivers (fully burdened labor costs, regional variations, etc.) and coalescing around a call to action (e.g., identifying labor outliers to shift the internal/external labor mix)
Cost center owners make informed IT staffing decisions by managing their people and resources, rather than abstract account numbers in an ERP system. Cost pool variance is a financial indicator of variance but does not empower cost center owners to manage their people. For that, they need labor costs reported by role and by region.
Informed labor decisions require a view of fully-burdened labor costs and visibility into business decisions that need hiring pivots. When per employee costs go up, organizations need to know the trade-offs they can make by changing hiring profiles or cutting resources in expensive regions and expanding into more affordable ones.
Understanding infrastructure spend, app/service supports costs, and project spend helps organizations better prepare to proactively alter the labor mix to meet a changed circumstance. This is the crux of any informed labor decision framework.
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