Business Executive Series #1

Cost for Commodity IT Services

Representative goal statement – “I need to make sure that we have the lowest cost alternative for commodity services.”

As I wrote previously, the popularity of this theme somewhat surprised me. The support statement leads me to believe that the authoring business exec consumes a great deal of commodity IT services in their business, has IT cost information at a summary level (end user, data center/platform, network) only and little information from IT on the industry benchmark for that service (and what IT is doing on a continuous improvement basis).

Providing cost information at a meaningful level requires the services that IT provides be broken down in a fashion that allows IT services to be recognizable by the business. For example, assuming that the “Telecom” team provides all communication services, they would be tasked with defining their services from a business customer perspective.

Examples of the services offered by this group might look like:

• Video Conferencing Services
• Voice Communication Services
• Network Connectivity Services
• Call Center Services

Each of these would have a Service Description, Inclusions & Exclusions, and Options. An example for Video Conferencing is in the Library. It has additional information, but for the purpose of this discussion, that information is not needed.

Once this information is ready, the Finance organization is needed to help IT assemble the components of cost for each service. This includes depreciation on equipment, external service support contracts, cost for the staff supporting the service – whatever all the elements necessary to provide the service might be. Once this data is put together, unit costs may be calculated and cost reports generated for each discrete service.

Industry benchmark information for IT Services is generally available from several sources. I generally advise spending a few dollars with a consulting firm to get data specific to your industry and competitors. This will establish a relevant cost benchmark for your IT services.

Inevitably, there is a huge difference between your calculated service cost and the industry benchmark cost. IT generally explains this as a difference in the quality of the service and/or that there are more things “included” in your service. Both may be true and are irrelevant. Remember that by definition, these are commodity services. Therefore, any deviation from the service norm must raise the question of what the business value of a differentiated commodity is. Generally, this quickly leads to the realization that the primary dimension of value for the commodity service is cost and that the differentiated service should be brought in line with the norm to position the business to realize the cost benefit.

Now that the service has been adapted to the norm (same service quality and features), we can make a more accurate comparison of our cost vs. the industry benchmark and set our goal to deliver “Benchmark service at benchmark cost” for our commodity services to the business.

This then raises the question of who is going to deliver on that goal. Organizational questions around accountability and whether or not it is currently in anyone’s current job description will need to be raised. Unless some dimensions of a Managed Services model is already in place, all the elements of cost for the delivery of service will probably not be under a particular technology/manager and that the role of a Service Delivery Manager (the logical choice under Managed Services) may not exist in the organization. This will make assignment of accountability and subsequent ability to succeed more problematic.

In the short-term, it may be practical to make the group manager for each technology responsible for the goal. Chances are that they will have most of the factors of cost for each service somewhere within their domain and will have some ability to delegate the supporting work within their groups. This overlay technique is not the long-term solution because there is more work for each technology group to sustain it over time than in either their current operating model or a Managed Services model.

Part of the role of the person accountable would be to develop continuous improvement plans and offer options and tradeoffs for services to the business. The continuous improvement plans would initially be focused on what is being done to achieve the benchmark cost and service quality goals. The service options and tradeoffs may be in the context of cheaper technology to meet the demand of the customer (e.g. thin clients vs. standard desktops).

So far we have discussed a primarily supply-side approach to cost improvement (IT working to reduce unit cost for services). However, one of the most underused, yet high-value initiatives that can be undertaken by IT is working with the business on demand for commodity IT services. Once consumption information is available at a business unit/function level, IT can initiate conversations with business partners on how much of what they use and what cost reduction opportunities may exist via standardization of equipment and provisioning policies (i.e. “who gets what”).

Implementation of a full Managed Services model for IT will also enable an effective IT response to this business goal. It will provide the information necessary to for the cost information framework, benchmarking and accountability for results. Finally, it will also enable subsequent multi-sourcing efforts to further reduce unit cost.

And that is a longer story…