Expert Opinion – Effective Cost Transparency Through Strong Cost Models

Effective cost transparency through strong cost models

The many benefits of cost transparency can only be achieved if you have a strong cost model that uses the best possible cost drivers.

While it has been clearly demonstrated that cost transparency in a shared services environment helps to increase efficiencies and reduce wastage across the enterprise, it is important that the enterprise utilizes the best possible cost drivers.

Although information is readily available online regarding how to construct a good cost model and what to consider, when it comes to guidance on what drivers are best to use or which are even available, there is very little easily accessible data. Therefore, when choosing an appropriate driver, there are certain things businesses need to take into consideration.

Not surprisingly, the first issue is to determine what data is in fact available and whether the data source is repeatable, accurate and complete. A second consideration is to ensure that the driver is clearly understandable so that end-consumers not only know how the service is allocated, but also gain trust in the cost model.

It doesn’t take an expert to tell you that the best models are built on a foundation of simplicity and comprehensibility, and one should always apply the fundamental principle of charging the initial consumer of the service, not the ultimate end-beneficiary. That way the fully loaded costs of services along the service value chain can be better understood and accurately established.

Drivers based on consumption or usage ensure that the consumption of the product or service is in fact what drives the cost associated with that particular service. However, these drivers can also cause incorrect behaviors in your end-consumers; for example, when the cost of an IT helpdesk is allocated to end-consumers based on their calls made, this will cause them to stop calling the helpdesk, as a way of avoiding allocation charges. Accordingly, we need to ensure the driver that is used generates the desired behavior.

It is also worth noting that linking consumption behavior to the cost of a service, and coupling this with detailed granular usage information, makes it simple for consumers to understand the service charge. This, in turn, allows them to manage, influence and therefore change their allocation charges. This is the beauty of using a solution like Magic Orange, which delivers the level of detail required to ensure that the users of the service being consumed understand it deeply enough to be able to alter their behavior accordingly.

In some instances, where detailed driver data might not always exist, a Configuration Management Database (CMDB) can typically deliver significant assistance in this regard. However, organisations often believe – erroneously, that internal systems of record are not accurate or adequately maintained. That leads to concerns that the business will not be able to drive sound decision making, due to the data being inaccurate or inaccessible.

This is not the case, as even when such data is not mature, cost transparency can still be implemented using a general allocation rule – ensuring materially correct and accurate allocations for the largest and material part of the data, and over time, refining the remaining balance, according to the 80:20 principle.

As you improve data quality over time, your business will then be well-positioned to implement a cost transparency model that will allow you to make significantly more informed IT and other shared services decisions. In fact, were you utilizing Magic Orange at this point, you would find yourself looking at how you could bring to fruition the savings generated in the short, medium and long term.

In the short term, you want to get business and stakeholder buy-in by delivering quick saves and focusing on low hanging fruit, to show a quick return on investment. Some examples of this include looking for unused products or services and eliminating their related spend.

Looking at the medium term, an application rationalization exercise should allow you to compare similar applications and to categorize which applications you should maintain, enhance or decommission.

Cost transparency is also about making sure spend and structure of products and services are right-sized for their purpose. There are inevitably trade-offs between cost, quality and risk, so you should assess the appetite for risk and quality and ensure cost is appropriately aligned.

Finally, in the long term, you should focus on building a continual improvement capability and discipline. To achieve this, you should ensure that when you source data to include into your cost model that it will yield benefits for the effort involved. Do this not once, but repeatedly and relentlessly, in your search for further savings opportunities and insights.

Ultimately, the cost transparency delivered by solutions like Magic Orange can bring many transformative changes – from operating model modifications to better decision-making capabilities, to how the Shared Service function and businesses relate to each other and how each other are perceived. There is no doubt that effectively leveraging cost transparency can be something of an art, but with it comes a massive potential upside.

Published on ITWeb.co.za

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Editorial: Petra Batho

petra.batho@magicorange.com