Smarter IT Cost Allocation
Accurate costing provides more bang for the technology buck    May 14, 2012

Summary

One of the major issues IT executives face is how to charge their departmental costs back to each part of the business according to their usage. If they can’t do this accurately, line-of-business managers have difficulty prioritizing the services they need from IT and end users may doubt the value of IT’s contribution to the business. Charge-back disagreements can hobble IT’s ability to make necessary investments in new capabilities and ultimately impact how effectively a company uses information technology. To align IT spending with the company’s needs, IT departments need correct information about costs and tools that can help deliver this analysis. Our benchmark research shows that when IT allocates costs accurately, its budget is likely to grow more than when it cannot. Thus there are good reasons for all organizations and IT management also to make sure they know what they are spending money on.

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Unless an IT department can calculate the real costs of the services it provides to specific parts of the business and charge for them accordingly, it is almost impossible for line-of-business department managers to assign priorities to the “keep the lights on” part of the budget, so even low-priority maintenance or upgrade efforts can crowd out all but the most pressing needs. The issue of allocating IT department costs also affects other parts of the organization. Finance typically handles the allocations in budgeting and profit calculations, and even senior corporate executives should be concerned since optimal use of technology can boost business performance and the bottom line.

The findings of our benchmark research shed light on the fundamental problems that companies face in allocating IT costs: Either they are not collecting the right information about the costs or they do not have a process that connects that information to the appropriate action – for example, they do not charge costs accurately enough to end users, with the result that the users have a hard time making rational decisions about how much to spend. Many suffer from some combination of the two. Thus, having greater visibility into what a company actually is spending and on whose behalf and a better process for deciding what to spend money on are likely to increase the value the IT budget buys.

The research also uncovered the existence of a virtuous cycle in accurately measuring and charging IT costs. Companies that are more effective in using their IT budgets are also likely to have had greater IT budget increases in the preceding years than those that were less effective. In other words, a more accurate costing system gives a company more bang for its IT buck, which results in more bucks for IT. IT departments that give business managers better visibility and control over IT costs charged back to them – and can demonstrate to their business clients that they are getting a positive return on their investment – are likely to be rewarded with higher budgets than those that do not or cannot.

Assessment

Tracking actual IT costs and charging them to specific users who incur them is the best way to be sure funds are spent well. Having visibility into the true costs of IT resources and a process for controlling them promotes better use of the resources. CIOs must have the ability to track who and what are driving which IT costs. CFOs should play a larger role by ensuring that IT costs and cost drivers are more visible to the organization rather than relying on broad-brush allocations. CEOs must understand the importance of aligning IT spending and the strategic requirements of the company. Together they must ensure there is a formal process for periodically reviewing that alignment and capabilities. Organizations that measure accurately spending on and use of information technology will derive more cost-efficient value from it.


 

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