Posts Tagged ‘trnsparency’

Achieving IT Financial transparency with activity based costing

by Brian Superczynski on April 26, 2010

Transparency of IT costs continues to gain momentum as a shared strategic goal between business units and their IT organizations.  It is therefore no surprise that Activity Based Costing (ABC) or activity based cost accounting has become a popular methodology to track spending beyond standard accounting codes to provide greater transparency to IT cost drivers.  Spend with ABC is not just a tracked by dollars and cents, but by function, portfolio, location, application, or any other way that is meaningful to the people ultimately paying the IT bills.  A successful implementation of ABC not only includes the “nuts and bolts” of implementation but also identifies responsibilities for socializing the results and providing actionable findings and suggestions.

IMPLEMENTATION CONSIDERATIONS:

Creating an assessment of how costs and metrics are currently tracked within an organization is critical in determining how quickly an ABC system can be implemented and then creating a maturity roadmap.  As an example, tracking resource costs and what those resources are working on is an important component to providing transparency to application development and support.  A mature organization may have a time-keeping system already in place to segregate their personnel costs.  However, even companies that do not have a formal time-keeping system in place can simply use cost centers to identify labor costs by application or project support costs.  The point is – options always exist to apply costs and your metrics to the cost drivers within your organization.  Another common assessment that will need to be performed is to identify how your organization tracks system utilization (MIPS– Million Instructions per Second, OLTP – On Line Transaction Processing, etc).  Once these assessments have been performed, you can put a system and reports in place to provide transparency to your cost structure and also define a roadmap for improving your metrics gathering.

SAMPLE OF ABC TRANSPARENCY:

A common ABC system implementation may track costs by

  1. region or country,
  2. location within the region/country,
  3. portfolio or function, (application, operational group, etc) and
  4. Expense or Capital account code.

Using network costs as an example, the ABC output will show how network costs vary by region down to the labor, transport and equipment costs.  This allows business units to compare their support cost with other units and if appropriate, even benchmark their internal performance.

SOCIALIZATION OF TRANSPARENCY:

In order to insure activity based cost accounting is not just another finance owned exercise to show executives and business units another way to slice the IT budget there must be joint ownership with IT leaders in explaining the results.  It is therefore imperative to structure your activity based accounting system in a manner which coincides with how the IT organization is structured to deliver services and implement new initiatives.  Many organizations today utilize a type of functional or “portfolio management” structure to align IT service delivery with the business units they support.  As an example, an IT organization of a full service banking institution would have units which are responsible for delivering services and understanding the needs of three separate lines of internal businesses or portfolios:

  1. Commercial and Private Banking
  2. Commercial and Home Loans
  3. Brokerage and Investment Services

In this example, the activity based cost accounting would be structured in order to explain the costs associated with operating systems and applications that support these specific lines of businesses.  The portfolio manager would work jointly with the finance organization to translate the activity based cost accounting results in a manner which will provide transparency to the business units.  Furthermore, the reports would be structured in a manner which would provide the business units with options or “levers to pull” to modify and thereby reduce the costs of the services provided by their IT organizations.

When implemented properly, ABC is a tool that can be used by all levels of management to make important decisions in a more educated manner.  When used in conjunction with operational metrics, results including best practices and efficiency become known… and from this point; true organizational improvement can happen.