Consulting Industry Insights: Cost Allocation for IT Services

KPMG recently came out with a paper about how cost allocation for IT services needs to change because of the growing popularity of the cloud. Cloud IT services have the advantage of usage based pricing, quick scale up and down, and transparency about usage and pricing.

Essentially, they’ve observed that because of the option of cloud services exists shared services organizations need to up their game and provide more transparency about how and what they’re charging for.

What are the Users Looking For?

The users are looking for:

1. Pricing and charge back methodology. They want to know how and what they’re being charged for.

2. Value. They want to make sure they aren’t being charged for anything they aren’t using or don’t need.

3. Flexibility. They want to be able to scale up and down if necessary.

What are the Levels of Service Cost Allocation Maturity?

Levels of Cost Allocation Maturity

They also came up with a model for the different levels of cost allocation maturity and how a provider can transition between the levels. Next, we’ll walk through each of these transitions to see how a provider can bring transparency to cost allocation.

Sub-Optimized (Level 1) to Rationalized (Level 2) 

There seem to be two steps:

1. The provider needs to set up a concrete strategy to move toward cost allocation transparency. This would be things like putting in the technology to remove services as appropriate, having cost data sufficiently segmented to allow transparent allocation.

2. Track costs and segment them by category, geography, project, group, etc.

Rationalized (Level 2) to Sub-Optimized (Level 3)

Division Allocation

The goal at this stage is to allocate costs based on usage for both direct and indirect costs and show the customer it’s being done that way.

To do this, you need to implement and track resource units (RU). A Resource Unit is something you can use to measure how much service is being delivered. In the case of help desk services, it might be something like the number of help desk users, or for desktop computing it may be the number of desktops.

Once you establish the RUs, use them to track service volume and allocate cost.

Optimized (Level 3) to Strategic (Level 4) 

To make the transition toward strategic cost allocation, you need to implement more communication between the provider and the user. This would include things like forecasting usage of resource units (so the user isn’t faced with sudden price increases) and performing periodic price comparisons with industry standards.

Strategic (Level 4) to Differentiated (Level 5)

To make the final transition to the highest level of cost allocation maturity an organization must:

1. Optimize its operations to lower taxes / tariffs.

2. Implement tiered offerings.

3. Implement automated processes and tools to assist with the cost allocation process.

Conclusion

For provider organizations to survive the challenge of the cloud, they must provide transparency to their cost allocation process.

In this article we have touched on how a provider organization can do just that. Ultimately the users want to know how much they’re being charged and why, that they aren’t being overcharged, and that they can scale up or down service quickly if necessary.

If the provider can offer that, they can likely retain customers despite the challenge of the cloud.

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