Although most CIOs strive to shift the focus on IT costs to one of business
value, they realize that ongoing cost management is crucial to IT operation. The
basis for effective cost management is understanding cost structure and
analyzing the costs flowing through that structure. I’ll present a model for
framing cost structure along with the steps required to implement that
model.The views in play
Two cost views drive the model. The first, the functional view, associates cost with an IT business function. The second and more traditional, the category view, tags costs with specific identifiers that usually reflect a subset of either people or nonpeople cost categories. Both views are essential to understanding, monitoring, and managing your costs.
The functional view
Figure A depicts generic IT business functions. The value of this functional view is twofold. First, it provides a functional basis for analyzing costs, which enables you to see how you allocate resources functionally and positions you to analyze the impact that spending on one function exerts on the others.
Second, it provides a logical context for communicating effectively with your business partners regarding resource allocation, alignment of spending with business objectives, and the relationship between spending today and future operating costs. Those communications are key to effective ongoing IT cost management.
| Figure A |
 |
| Generic IT business functions |
The category view
The second view of IT cost slots specific expenses into cost or account categories. This is the traditional financial reporting view that managers across any organization encounter. Managers are familiar with the common cost categories, such as salary, benefits, rent, and travel, but they probably are unaware of all the available cost categories. Those categories provide the foundation for this view, and the organization’s chart of accounts defines and documents them. You can download a sample chart of IT accounts to use and customize for your enterprise needs.
If a chart of accounts doesn’t include categories established specifically for IT, the reporting based on it obviously provides little value to IT. Standard cost categories, such as equipment and fees, are too general to provide any useful IT cost management information—the IT organization must expand the standard chart of accounts to meet its needs. The cost categories an IT organization chooses to add to the chart of accounts can vary, but a standard expansion will serve most IT needs.
The category view resulting from using such a chart of accounts generates value by providing actionable information. Information reported in meaningful categories over time positions managers to answer the three questions that effective cost management poses: What are we spending money on, how much are we spending, and how is it changing?
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This article sounds like it was written by a college professor with absolutely no real life business experience.
Posted by anonymous on Thursday, November 06 2003 05:54 PM