Costs & Benefits
Best practices: Cost transparency in IT
by Jeremy Smith
Reducing IT costs is always on the management agenda, not just in times of economic crisis. Many IT organisations find that there is no real transparency over costs. We show you ways to structure and demonstrate IT expenditure effectively.
In the current economic climate, creating or improving IT cost transparency is a key challenge for many organisations, and a decisive factor for fast, effective management. IT managers can take action in a number of areas to present their costs (and benefits) more effectively. Below are our recommendations for optimising IT cost reporting:
1. The right level of detail
An optimal level of cost transparency that meets the specific needs of an IT organisation can only be developed by assessing the current situation. However, there is no one-size-fits-all solution. Therefore, the initial focus should be on determining an appropriate and sensible level of transparency from a strategic perspective. This takes into account regulatory requirements, existing billing models, and IT control requirements. After all, excessive detail can unnecessarily increase costs.
2. Uniform understanding of terminology
Time and again, we have observed that the definitions of IT costs, running costs, change costs and project costs differ within organisations. As a result, visibility of IT costs is severely limited without this being noticed. This raises the question of how an IT organisation deals with IT costs arising from uncoordinated software or hardware orders, for example, by the business units.
3. Consideration of non-financial indicators
To optimise existing IT cost reporting, it is important to integrate qualitative performance data alongside financial indicators. This combination provides a more comprehensive perspective, offering insight beyond pure costs and making the value added by IT more transparent. For instance, an organisation's network costs can be evaluated more accurately by considering specific metrics such as the cost per LAN port alongside the total costs. This enables management to make more informed decisions based on meaningful data.
4. Automation of cost reporting
In most of our benchmark projects, we have found that obtaining the required level of detail in terms of information and key figures poses a major challenge for many organisations. This results in a high level of manual effort being required, sometimes necessitating the involvement of several specialists. Therefore, the goal of every IT organisation should be to automate cost reporting. This enables IT costs to be monitored on an ongoing basis, allowing cost drivers to be identified early on and enabling proactive measures to be taken.
5. Frameworks for IT cost transparency
Greater transparency can be achieved by implementing and using established IT cost models. One example is the TBM framework, which aims to provide transparency in IT cost, expenditure and service areas. TBM offers a standard taxonomy to facilitate efficient coordination between IT, finance, and business units. It categorises cost sources, technologies, IT resources ('towers') and solutions. However, as TBM details can be interpreted in different ways, it is important to ensure a consistent and standardised understanding of all methods and terminology within the company before introducing it.
6. Introduction of minimum standards
In particular, IT costs in larger organisations with complex structures are reported to central IT in varying degrees of detail and in different formats. For example, we observed that, within one multinational corporation, some units reported IT costs to the central IT department based on the TBM (Technology Business Management) framework, while others still relied on outdated structures. Introducing appropriate minimum standards ultimately improves IT cost transparency with minimal effort.
7. Service catalogue optimisation
IT service catalogues are considered an essential management tool and facilitate the design of the necessary structures. In order to improve IT cost transparency, the service catalogue should contain clear performance and quality commitments, as well as an associated cost model. This allows IT organisations to formalise their service offerings in terms of scope, quality and costs, and establishes a basis for measuring productivity, efficiency and cost-effectiveness. An optimised service catalogue does not usually need to be rebuilt from scratch, but can instead be based on an organisation's existing building blocks or architecture management.
Analyse status, implement goals and control costs
Common weaknesses include a lack of detailed information in cost accounting and major inaccuracies in the allocation of costs according to the source. Our projects therefore usually begin with a detailed analysis of existing costs and cost structures, followed by the design of an individual target scenario. The outcome of this implementation process is a cost centre structure (e.g. end-user computing, support, network and infrastructure) and a cost type structure (e.g. personnel and material costs, including hardware and software) that is tailored to the organisation. Based on these defined structures, the internal IT costs of different company divisions can be controlled and compared with the market more easily.
If you have any questions or suggestions regarding IT cost transparency, please feel free to contact me by email.
