Understanding a Cost Model
Definition of a Cost Model
Gartner defines the purpose of a cost model as follows: “To define the data structure required to aggregate and allocate sources of spend and consumption data into a common data construct” (from “Build a Focused ITFM Cost Model and Use a Simple Allocation Approach to Deliver Rapid Value” by Robert Naegle & Chris Ganly, 2020).
In simpler terms, a cost model:
Combines General Ledger spend, services, and consumption data/service relationships.
Creates data that enables views, transparency, and insights into spend.
Comprises the allocation logic from source to consumer while enriching data through the process.
Provides internal rules of who can allocate to whom and the rules that govern how costs flow.
Defines services and allocates spend into those services and from those services to the consumers.
Key Functions of a Cost Model
A cost model plays several crucial roles in an organisation:
- It aggregates various sources of spend and consumption data into a common structure, allowing for comprehensive analysis and transparency.
- It uses allocation logic to distribute costs from their sources to their consumers, ensuring that data is enriched and detailed through the process.
- It sets internal rules for cost allocation, governing how costs flow within the organisation.
- It defines the services to be measured or priced and allocates the spend accordingly.
Benefits of a Cost Model
Enabling Multiple Views of Spend
A cost model enables multiple views of spend, creating the transparency needed to manage and optimise expenditure effectively. This multi-dimensional view helps stakeholders understand where and how resources are being utilized.
Repeatable Data Structure
A well-designed cost model creates a repeatable data structure that can be maintained and refreshed regularly (e.g., monthly, quarterly, annually). Automation can aid in this process, making it easier to introduce new services and keep the data current.
Scalability and Flexibility
When built for scale, a cost model can expand and adapt to new stakeholder requirements. For instance, stakeholders might request to see the total cost of the organisation’s most expensive application. A scalable cost model can accommodate such evolving needs.
Baseline for Budgets and Forecasts
Cost models provide a detailed baseline for future budgets and forecasts. They allow organisations to compare different scenarios, supporting strategic financial planning and decision-making. This capability forms the basis for practices like showback and chargeback.
Tools for Housing a Cost Model
Excel as a Common Birthplace
Many cost models initially reside in Excel due to its accessibility and familiarity. However, Excel becomes less agile and scalable as data volumes grow, allocation keys change and new products and services are introduced. It can no longer meet the demands of a complex and dynamic cost model.
Need for ITFM Tools
As the complexity of cost models increases, the need for specialized ITFM tools like MagicOrange becomes apparent. These tools can automate cost models, providing the flexibility to expand and evolve rapidly. They also offer comprehensive self-service analytics, enabling stakeholders to gain insights independently.
Why Choose MagicOrange for Cost Models?
Automation and Flexibility
MagicOrange automates cost models, ensuring they remain flexible and scalable. This automation allows for rapid adaptation to new business needs and the continuous inclusion of new services and data points.
Comprehensive Self-Service Analytics
MagicOrange provides detailed and insightful self-service analytics. Stakeholders can explore and analyze data independently, making informed decisions based on accurate and up-to-date information.
A robust cost model is essential for effective IT financial management. It enables multiple views of spend, maintains a repeatable data structure, scales with business needs, and forms a solid baseline for budgets and forecasts. While Excel may serve as a starting point, tools like MagicOrange are necessary for automating and enhancing cost models to meet the growing demands of modern enterprises.
