What Drives Full Cost Transparency

The Importance of Effective Cost Drivers

Understanding Cost Drivers

Cost drivers are the elements within an enterprise that create overhead costs weighed against the goods or services provided. They serve as the basis for allocating costs or as the allocation method, linking costs to specific business services.

Key Challenges in Achieving Cost Transparency

Many C-level executives recognize the value of cost transparency but face significant obstacles due to the availability, reliability, and timeliness of data. The complexity of IT environments and the proliferation of as-a-service offerings make obtaining and analysing the right data even more critical.

Choosing the Right Cost Drivers

Data Availability and Accuracy

The first step is to assess whether the necessary data is available within the organisation. It’s crucial to ensure that the data source is repeatable, accurate, and complete to build a robust cost model.

Simplicity and Comprehensibility

Cost drivers must be easy to comprehend and intuitive. When end-consumers understand how services are allocated, they are more likely to trust the cost model. Following the ‘Keep It Straight and Simple’ (KISS) principle helps ensure a foundation of simplicity and understandability.

Allowing for Optionality

Cost allocations and drivers are most powerful when they allow users to opt out or change their consumption behavior to something more appropriate. This flexibility encourages users to manage their consumption responsibly.

Driving Correct User Behavior

Continuous Focus on User Behavior

Driving correct user behavior needs continuous focus. Even good cost drivers can lead to incorrect behaviors if not monitored. For example, allocating IT help desk costs based on usage may discourage users from seeking necessary support to avoid charges.

Impact of Economies of Scale

Early adopters of new services often subsidize future consumers. To mitigate this, enterprises should lower the rate or use weighted drivers to subsidize new services, ensuring fair cost distribution.

Treating Shared Services as Business Units

Treating shared services as true business units enhances their efficiency and innovation. This approach makes services more effective in meeting buyers’ needs and more cost-competitive compared to external markets.

Best Practices for Cost Drivers

Consumption or Usage-Based Drivers

One of the best cost drivers is consumption or usage, as it directly links consumption behavior to the cost of a service. This approach allows consumers to understand and influence their charges based on detailed usage information.

Handling Absence of Detailed Data

In the absence of detailed data, organisations can use loose-linked data for cost allocation. High-level estimates, such as percentage IT spend per recipient, can be refined over time as specific data becomes available.

Maintaining Accurate Cost Models

Keeping Driver Data Up-to-Date

Regularly updating cost driver information is essential for maintaining an accurate cost model. Organisations should balance the cost of updating data against the benefits gained from enhanced accuracy.

Documenting and Maintaining Processes

Documenting the procedures for gathering and maintaining driver data ensures the data remains current and accurate. Establishing a business process for updating driver data helps prevent outdated allocation logic and incorrect decision-making.

Achieving full cost transparency requires effective cost drivers and a commitment to maintaining accurate data. By adopting best practices and focusing on simplicity and comprehensibility, organisations can manage their costs more effectively and make informed strategic decisions.