By Peter Hennigan
Tuesday, October 01 2002 12:00 PM
URL: http://www.zdnetasia.com/insight/business/0,39051970,39081675,00.htm

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.

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?

Follow this model for effective IT cost management
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Bringing cost management into play
Answering the three questions above leads to the following additional questions that ultimately produce cost management actions:

What are my cost drivers? What business need is driving the cost? Is that need consistent with known business objectives? Does the business understand this dynamic? How do we acquire the product, service, or resource that produces the cost? Do my acquisition practices minimize the costs? Can we source certain acquisitions more cost effectively? How do we manage the ongoing cost? Do we understand to what degree costs are fixed or variable? Are we managing contractual commitments? How can we influence them? Does current capacity align with current business need?

If organizations address these questions on an ongoing basis, coherent cost management actions result. Developing those actions relies on the information that the category view provides.

The implementation process
The functional and category cost views drive a basic IT cost model. That model may not address all the cost management challenges presented. You may face the need to view IT cost information on a project, application, business process, or fixed/variable basis. Although this model doesn’t specifically address those needs, it does provide the foundation required to address them.

Even more importantly, it does so in a manner that is easily implemented in most organizations. Most standard financial reporting systems can provide functional and category cost views; consequently, implementing the cost model presented is not complex.

The chart of accounts is the key to implementing the category view. Work with your organization’s finance group to expand the chart to meet your needs. Most financial systems allow for expansion of the standard chart, and the process for doing so should be fairly simple.

The functional view often closely matches the IT organizational structure, so the pertinent financial system data element is the cost center or department. First, design your structure to meet your needs, and then work with finance to establish the cost center/departments in the financial systems. This process is also straightforward.

Once you’ve made the changes to your financial systems, you must take the necessary steps to ensure that expenses are correctly coded according to your new cost structure. At a minimum, this will require documentation of the changes and some degree of training. At most, it may require you to review and possibly modify your current expense-handling processes.

Final thought
No CIOs want to overly focus on the cost view of their organization, but business reality dictates that CIOs must manage their costs at least as effectively as any other operating unit.

A simple cost model that provides actionable information provides the basis for effective cost management. If such a model isn’t in place, implementing one will allow you to reap benefits far outweighing the effort it requires.