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3 Reasons Why Service Costing Isn't Working

Laudable progress has been made in showing line managers what they're paying for, but three things still get in the way of smarter consumption of IT's services

Invoice bill chargeThe centrality of technology to almost any business decision or task and the lofty expectations that employees now have of what corporate technology should provide – buoyed by the cornucopia of gadgets at home – make IT cost management a complex topic.

IT’s business partners (those in the line that work with IT) are increasingly asking IT to provide greater financial detail because they’re not sure how well IT is managing the funds. The problem is that IT is typically well-equipped to measure the cost of new projects and technology purchases, but not the cost of ongoing operations and maintenance, which represent the majority of spending.

To provide better cost information, some IT infrastructure teams (those that manage the company’s technology infrastructure) have put guidelines in place to constrain the amount and detail of information provided to business partners about the costs of the IT services they consume.

While these infrastructure teams still conduct a full analysis of IT consumption, they look beyond itemized technology expenses. From there, they communicate to the line only the limited set of unit costs that resonate what the business was using IT services for. This increases business partners’ ability to understand the trade-offs they must make between what the technology provides and what it costs.

Why Service Costing Isn’t Working

Despite this approach to improving the line’s understanding of IT costs, it hasn’t motivated the line to make a lasting change in how they consume IT services, and so IT infrastructure costs are still not as well managed as they should be. There are three major reasons for this.

  1. IT isn’t connecting the dots to help business partners understand infrastructure service costs: There have been laudable efforts to improve the clarity of the “bill of service” presented to business partners (whether they are actually charged or just shown the total cost) to help demand management conversations.

    But, while being clear about invoicing will answer short-term questions (e.g., what’s driving my network cost up this year? How do our hosting costs compare to the cloud?), it won’t always draw out the questions, insights, and decisions that have greater savings potential over the long term.

    Conversations that explain, for instance, how growth in IT maintenance and support will “crowd out” innovation investments requires the ability to show not just actual costs, but the opportunity costs of how services are currently used. There is a paradox here: the data that might be required to spark such a complex conversation might go against the discipline of simplicity that many IT teams have worked towards with their invoicing.

  2. “Run costs” don’t motivate change by themselves: IT is more integral to companies’ customer service and employee productivity today than it ever has been. The consequence, however, is that the “run” part of the infrastructure team’s remit can be put in the same category as overhead lighting — it may require extreme circumstances for business partners to want to consume it more efficiently.

    Part of the problem is expectations management. One senior infrastructure manager in CEB’s membership says that infrastructure teams have inadvertently “trained” business partners to have conversations (and form expectations) about services across the board, rather than focus service and support on critical use cases (i.e., where there is already demand from the business to improve the service or cut costs).

  3. IT can initiate a cost conversation, but it might not motivate business partners to act: This clearly stems from the two points above. Business partners can’t see the opportunity for change, or they can’t see an alternative to the present situation (the “run” cost of business). Related to this second point is the possibility that they may not have the capacity to either execute a change in service consumption behavior, or enough support in their business line to effect a change in service consumption behavior.

    This raises a question about whether Infrastructure needs to provide more consulting or change management support to help partners identify and reduce costs through better service consumption behavior, and the question of whether making changes to service consumption behavior are too important to leave to business partners, or a costing mechanism, alone.


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