What Does IT Cost? This article appeared in Volume One of VIEWPOINT, Focus On: CMDB, published by BMC Software.

Transcription

1 What Does IT Cost? This article appeared in Volume One of VIEWPOINT, Focus On: CMDB, published by BMC Software. To receive a copy of VIEWPOINT, please go to 1

2 VALUE OF THE CMDB WHAT DOES I.T. CO$T? By TROY DuMOULIN IT organizations face increasing pressure to understand cost and manage that cost in an ideal mix to support the business. The CMDB can be a key enabler for costing IT services. Most IT organizations have heard it from the top: Get a handle on your costs. But how do you cost what you haven t defined and modeled? The answer: Very inaccurately. Lacking service definitions, IT organizations usually cost what they understand. They will cost components or sets of components; a set of servers, an application, but not a service. Instead of coming from a service perspective, they use a bottom-up technology costing perspective, which has no bearing on how the consumers of those services actually consume them. As a result, organizations cannot justify their expenses or use costing as a management and planning tool in terms the customer can understand. Most, if not all, organizations have a misalignment between how IT is costed and how services are delivered. That is confusing for business executives who receive a client bill on one side and a service level agreement (SLA) on the other nothing correlates the two. Business customers are demanding more visibility into IT costs from a perspective they understand. The challenge with this concept is that you cannot provide more visibility until you ve defined your services in relationship to the business functions they support. A configuration management database (CMDB) and the service model it enables are the keys to costing IT services. By defining and modeling IT services in relationship to their business use as well as applying a service- 1

3 based costing framework, IT organizations can more accurately track IT costs. DEFINING I.T. SERVICES P erforming Service Level Management, and later the costing of IT services, requires the definition of IT services within a service catalog. The IT organization will use that catalog to negotiate SLAs with customers. IT provides two types of services: technical services and professional services. Technical services are technology-based capabilities that the customer consumes or uses to facilitate a business process or function. Technical services include: > > File/Print > Application-based services > Network or Internet access > Office or desktop productivity > Voice communications Professional services are the value-added activities that the IT staff provides to support, maintain, monitor, or ensure the consistent and reliable delivery of technical services. Professional services include: > IT architecture and engineering > IT security > IT support > Project management services > Procurement services > Application development and enhancement services 2

4 VALUE OF THE CMDB Note: Organizations that fail to define professional services are largely forced to report this type of activity as overhead instead of value-added and necessary services. This article focuses on technical services. In addition to distinguishing service types, you should separate services according to three basic classifications: core, subscription, and discretionary services. These classifications are especially important when you create and implement a costing model. The list of services within these classifications must be determined by each organization and will change depending on the environment or business model being employed. CORE OR ESSENTIAL SERVICES A core service is a service required by all business stakeholders and for which each line-of-business stakeholder must pay an appropriate share. These services are like air: You need them to exist, and you cannot opt out of their use or consumption. Typical examples of core services include: > Data and local area network (LAN) > > IT support > Voice > Security SUBSCRIPTION SERVICES A subscription service can be chosen in an a la carte manner influenced by the customer s business function. These services will appear on the bill of only those customers that specifically use or subscribe to the services. Subscription services are typically application-based services and are described according to the business process or function they support. Examples include: > Enterprise resource planning (ERP) services > Power generation systems > Online banking > Trading applications > Human resources management > Market research > Enhanced desktop management or forward deployed support DISCRETIONARY SERVICES IT provides discretionary services on a payas-you-go basis. These services are usually charged back to a customer only if the customer requests them for a special activity outside a standard service package. Examples of discretionary services include: > Project management > IT consulting > Architectural reviews of new technology > Procurement services When modeling IT services, it is important to understand a basic hierarchy that links services in the catalog to CMDB infrastructure components. A full description of these services in an IT service catalog, including options for level and availability, is the domain of Service Level Management and is outside the scope of this article. For the purposes of modeling and costing IT services, defining and classifying services as a design input is enough. Going forward, the service definitions used in costing and billing must be kept in alignment with the service catalog. MODELING I.T. SERVICES After IT services have been defined and documented, they should be modeled within the CMDB. When modeling IT services, it is important to understand a basic hierarchy that links services in the catalog to CMDB infrastructure components. This hierarchy encompasses IT services, IT systems, and configuration items (CIs). An IT service is one or more technical or professional IT capabilities that enables a business process. An IT service fulfills one or more needs of the customer, supports the customer s business objectives, and is perceived by the customer as a coherent whole or consumable product. 3

5 An IT system is an integrated composite that consists of one or more of the processes, hardware, software, facilities, and people that provides a capability to satisfy a stated need or objective. Sometimes referred to as a technology solution, an IT system is a collection of resources and CIs (or assets) that are necessary to deliver an IT service. A CI is a component of an IT infrastructure that is part of an IT system. CIs may vary widely in complexity, size, and type from a document or policy to an entire system or a single module or a minor hardware component. A CI is an Information Technology Infrastructure Library (ITIL ) term for what is often known as an IT asset. Modeling IT services includes the following steps: Step 1: Define major business processes. Step 2: Define enabling IT services. Step 3: Map IT systems to IT services. Step 4: Map IT components to IT systems. An IT organization must develop an object and data model that illustrates how different CIs are represented, which attributes they have, and what relationships connect them. The data model dictates how the IT services are mapped into the CMDB. The practical application of this model is the creation of logical CI records that represent IT services and how they break down into IT system, subsystem, and physical components. The concept presented by this approach allows the physical CIs (hardware, software, documents, and so forth) to be related in an IT service chain as illustrated in Figure 1. The end result is a database that presents both a business service view as well as a technology view of how CIs are related and support business processes. This model can help provide the following information: > How CIs within the scope of the process relate to IT business services > How direct and indirect asset costs are related to IT services > How availability figures relate to individual CIs, groupings of CIs, and overall service availability targets > Which CIs facilitate multiple IT services > Prioritization of CIs in relation to business criticality and function LOGICAL: LOGICAL: LOGICAL: PHYSICAL: FIGURE 1. Object Model and IT Services Platform (HW) Server 1 Server 2 System Software Exchange SW Service System (Lotus Notes) Databases SQL DB Documents Policy Size Limit > Distinction between logical and physical Configuration Items Logical: Subsystems and above Physical: Components and below > Tiered representation by vertically packaging design classes: Service System Subsystem Component Server 3 4

6 VALUE OF THE CMDB For each of the IT business services and technical IT systems defined, a record will be created within the logical structure in the CMDB. Once this structure is built within the CMDB, the logical structure will remain relatively static and will not change dramatically unless a new service is introduced into the environment. At a high level, cost-centered accounting is the practice of pointing all costs and expenses directly at a customer or organizational entity. This costing method is the most widely used since it works well with the concept of allocating the general cost of IT across all customers in whatever equitable fashion can be devised. Activity- or service-based costing is the practice of pointing all related costs and expenses at a defined activity or IT service. UNDERSTANDING I.T. COSTING FRAMEWORKS The ITIL Service Delivery book summarizes the two most basic approaches to costing: cost-centered accounting and activity- or service-based costing. Although ITIL indicates no preference for either approach, the logical preference would be servicebased costing for the simple reason that the philosophy of service management is more closely aligned with service-based costing. Activity- or service-based costing is the practice of pointing all related costs and expenses at a defined activity or IT service. Once the service has been completely costed, a unit cost is defined. This unit becomes the tool for understanding how the activity or service can be allocated to a customer on the basis of the customer s consumption of the service. By its very name, service-based costing suggests an end-to-end view of the costs of delivering an IT service. In practice, a costing methodology and set of cost centers must be defined using the service definitions provided by the service level management process and as published in the service catalog. In principle, the line items appearing FIGURE 2. Service-Based Costing External Service Software People Transfer Hardware Facilities Direct Costs Indirect Costs Overhead Costs External Serv. Hardware Software People Hardware Software Accom. External Serv. People Transfer Accom. Direct Costs Indirect Costs Direct and Indirect Costs X% Margin % Margin built into the overhead, based on forecasted growth or unplanned expenses 5

7 those CIs that have no other service relationship. Some CIs will be related to several services in a cross-functional capacity. For example, an application server that hosts multiple applications would need to be allocated across however many services it facilitates. on the customer bill are synchronized with the services as they are defined within the SLAs, and with the CIs as they are captured and modeled within the CMDB. When establishing the indirect or shared costs, you also should consider component services. A component service or utility service is a fully costed service that is not directly displayed on the customer bill or cost recovery mechanisms. As a result of this decision, component services need to be allocated on top of a direct or customerfacing service so they can be recovered. As the IT industry has matured, providing a blanket cost for general IT is not good enough. If you don t provide visibility into costs, someone else will and you could be outsourced. Figure 2 illustrates how the principle of direct, indirect, and overhead costs all come together to provide a complete picture of service-based costing. Direct costs are clearly attributable to a single customer, service, or location. Indirect or shared costs are incurred on behalf of all, or a number of, customers, services, or locations. These costs are shared across customers and services and are allocated according to some driver, such as headcount or percentage. Unabsorbed or overhead costs are costs that cannot be directly attributed to a customer, service, or location. Examples of overhead costs include executive salaries and general administrative activities. A cost unit is a breakdown of the total cost of a service into a small unit that can be allocated to a consumer. An example of a unit cost is the cost per mailbox for an service charged to a line of business. The CIs and roles that are modeled against the IT service in the CMDB can help you derive the direct costs for the service fairly easily. Just query the financial attributes recorded against An example of a component or utility service would be the allocation of the network service across other services as a shared or indirect cost. Component services are allocated against other customer-facing services on the basis of a driver, or allocation method, which might be as simple as a straight percentage, headcount, floor space, or number of components. To develop service-based costing, an IT organization can follow these high-level steps: Step 1: Define IT services and systems. Step 2: Classify the services (core, subscription, discretionary). Step 3: Model the services and systems in the CMDB. Step 4: Decide which services and systems will appear directly on the customer bill. Step 5: Allocate the services that are not on the customer bill against other services. Step 6: Define drivers and an allocation methodology for the component services. Step 7: Define a unit cost for the customerfacing service on the basis of usage. 6

8 VALUE OF THE CMDB 1 The cost of IT services are aligned with the capabilities provided. 5 KEY BENEFITS 2 IT organizations can more accurately track IT costs. 3 OF SERVICE-BASED COSTING IT can help validate its existence by including professional services in the direct and indirect costs for IT services. 4 IT organizations can provide cost visibility to executive management, justify IT expenses, and use costing as a management and planning tool. 5 IT organizations can make trade-offs and decisions with their business customers managing expectations and continuing to support the business in a cost-effective way. ACHIEVING BETTER MANAGEMENT THROUGH SERVICE-BASED COSTING F or years, executive management has tolerated the costing of IT as a single cost center, which at the end of the fiscal year is allocated proportionally across the various client business units. But now, outsourcing and other options for service provision introduce cost pressure and competition to the IT organization. This pressure is pushing the inevitable requirement of more visibility into the true cost of service provision. As the IT industry has matured, providing a blanket cost for general IT is not good enough. If you don t provide visibility into costs, someone else will and you could be outsourced. Consider this scenario: The CEO walks into the CIO s office and says, How much does it cost for you to support ? If the CIO doesn t know, the CEO might say, Well, the board has decided that you re going to have an opportunity to bid on that against other services providers. You have until next Friday to figure it out. Many organizations resist the effort required for clear costing with the excuse that they do not charge back for IT services. However, consider the point that regardless of whether a formal invoice is submitted, the business ultimately still has to pay. Whether that s through a formal invoice or the transfer of funds to a cost center, it s still a movement of money to an IT organization based on some kind of definition. In a sense, charging is not really an option. The real question on the table is what level of visibility will be provided. No longer will an overall cost-center approach suffice. What is needed now is a cost-management approach. The CMDB enables you to implement a costing framework so that IT organizations can make trade-offs and decisions with their business customers managing expectations and continuing to support the business in a costeffective way. ABOUT THE AUTHOR Troy DuMoulin is an experienced executive consultant with a solid and rich background in business process re-engineering. Troy holds the Management Certificate in ITIL and has extensive experience in leading service management programs with a regional and global scope. His main focus at Pink Elephant is to deliver strategic- and tactical-level consulting services to clients based upon a demonstrated knowledge of organizational transformation issues. Troy is a frequent speaker at ITSM events and is a contributing author for the ITIL book Planning to Implement IT Service Management. This article is adapted from the Pink Elephant white paper Defining, Modeling, and Costing IT Services available at under the PinkPapers link. BMC Software, the BMC Software logos and all other BMC Software product or service names are registered trademarks or trademarks of BMC Software, Inc. All other registered trademarks or trademarks belong to their respective companies BMC Software, Inc. All rights reserved