What Service-Based Costing Really Means

A concept from ITIL could make a huge difference this budget cycle.

By N. Dean Meyer
Sun, September 30, 2007

CIO — Well, here it is budget season for many. And for too many, it's a frustrating game with little value added.

Meanwhile, I'm hearing a lot of buzz about the ITIL concept of service-based costing. Have we figured out the connection between that and an effective budget process?

For those few IT organizations that really understand and embrace service-based costing, budgeting is a valuable business planning and client negotiation process. But to make it work, they've had to extend the concept well beyond the limited view of ITIL.

Why Service-Based Costing Is Invaluable
With service-based costing, organizations calculate the full cost of their products and services. They propose a budget that includes not just the expected "keep the lights on" services but also the many things clients have requested and the many good ideas their IT entrepreneurs generate for better serving the business.

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In the process of developing such a budget, the managers define their businesses and their service catalogs. They forecast business volumes, both assured and speculative. Then they plan how they'll fulfill those business scenarios, defining the staff, contractors and vendors they will need; the direct and indirect expenses they will incur; and the capital investments required. They set aside time and money for business improvements, customer relations and innovation. And they determine their prices.

From there, budget negotiations become a matter of deciding what the organization's clients will and won't buy. It shouldn't be surprising to learn that their clients step forward (without any "training" or preparation) and defend IT projects. Yes, clients defend the IT budget!

And afterward, everybody understands exactly what the IT budget does and does not pay for. Service-based costing solves the notorious problem of managing expectations, builds a perception of the value the business receives from the IT budget and engenders trust through transparency.

Furthermore, knowing the cost of products and services is prerequisite to any sensible resource governance (for example, portfolio management or demand management) process. Clients need to understand how much is in their "checkbooks" and what things cost before they can meaningfully manage their demands.

In addition to a budget for products and services, service-based costing produces rates based on the full cost of IT products and services. These rates are the ideal benchmarks for competitive (outsourcing) comparisons.

An added benefit that's of great interest to many CIOs is the impact of the process on leadership development. Organizations that do service-based costing find that the experience of business and budget planning turns IT managers into real entrepreneurs.

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