Full Cost: It's Time to Pay Attention

Most IT leaders don't have a clue how important their business and cost planning processes are.

I hope my regular readers will forgive me if I break stride this month. Instead of playing my usual role of curmudgeon—blasting buzzwords with reality like they're the king with no clothing—I want to share with you a term that should be a buzzword but isn't yet: full cost.

Boring, you say? Just accounting? Hah! That's the point of this month's column. The king with no clothing this month is IT leaders who are busy with ERP, ITIL, project management and SDLCs; but they don't have a clue how important their business and cost planning processes are.

Sorry. I don't mean to insult you personally. Not at all. Throughout the industry, these critical processes aren't being discussed nearly enough. There may not be much buzz around full cost, but there should be. Have a look at what's at stake....

A Quick Exercise

Try this quick exercise: Put a (mental) check alongside any of the following concerns—widespread among CIOs—that are of signficance to you and your organization:

  1. Your budget is based on prior years or current staff rather than on the investment opportunities at hand, perhaps accompanied by mistrust in your budget submission.
  2. You're expected to "do more with less," deliver unfunded mandates, "take it out of hide" and otherwise make time and money out of thin air.
  3. Clients' expectations far exceed your available resources (demand management).
  4. Clients like being involved in your portfolio management process but are frustrated with the lack of clarity on what things cost and what they can afford.
  5. Clients feel that you cost too much, and perhaps are pursuing decentralization and outsourcing.
  6. You are subjected to apples-to-oranges, unfair comparisons to outsourcing.
  7. Clients complain about unfair allocations or pricing.
  8. Clients attempt to micromanage you, opposing expenditures on things you know you need but they don't directly value (like account representatives, infrastructure and internal process improvements).
  9. Governance processes are bureaucratic, expensive, slow and ineffective.
  10. Your staff sacrifice critical sustenance activities, like training and client relations, in the futile attempt to satisfy unmitigated demand that's well beyond available resources.
  11. Teamwork breaks down when internal "prime contractors" find that support staff have different priorities or lack resources.
  12. Customer focus is muted when staff don't know what they're selling to whom, perhaps exacerbated by an impotent product/service catalog.
  13. Your managers don't take responsibility for their businesses within the business, instead running to you for every little business decision.

If you really care about even one of these problems, you'd better pay attention to your business and cost planning processes. If a number of them ring true for you, be assured you're not alone. All these symptoms are, for the most part, caused by the processes by which you plan your business and your budget, allocations, and rates. In other words, they're all resource-related problems.

Full-Cost Maturity Model (FMM)

The connection between business/budget planning and all these resource-related problems is neatly explained in the just-released Full-Cost Maturity Model (FMM). FMM is a standard metric of an organization's capability to plan the full costs of its products and services. Just as Carnegie-Mellon's CMMI does for software engineering, FMM defines levels of maturity in your business planning processes. It asks: How clearly can you define your products and services, and document what they really cost shareholders/taxpayers/donors?

It's not a product, although there are software products that can get you there. It's a framework that neatly pulls together all the processes that create your operating plan, product/service catalog (with costs), budget, allocations and chargeback rates.

What's in a Full Cost

A key part of FMM is the definition of full cost. It says that every product and service should carry not only its direct costs, but also a fair share of all the internal service provider's indirect costs.

Indirect costs include all of the following:

  • Unbillable time: Time spent on activities that are done for the benefit of your organization, at your discretion, and not directly billable to customers. Examples include holidays, vacations, leave, administration, professional development, business development and customer relations, product research, planning, organizational improvements.
  • External indirect costs: Money spent outside your organization (on vendors) that is not directly related to a particular product or service, but rather maintains or enhances the capabilities of your organization.
  • Internal indirect costs: Money spent on peers within the department for the support services that are not directly related to a particular product or service.
  • Overhead within the department: Costs of support services that apply to all groups within your organization.
  • Corporate costs: Costs for support services acquired from other departments within the corporation.

But FMM goes on to state that not all costs are embedded in the price of clients' project and services. Even if an organization is expected to fully recover its costs through allocations or chargebacks, it still must receive direct funding (budget) for two special kinds of deliverables:

Subsidies are things an internal service provider does for the good of the corporation as a whole, not for individual business units. This includes services like policy and standards facilitation, coordination of decentralized functional counterparts, and unrelated activities like corporate committees and community-action initiatives—all things which your competitors (decentralization and outsourcing) don't necessarily have to do.

Ventures: On occasion, a department needs one-time funding for significant investments that improve its effectiveness. Examples include the purchase of infrastructure, the costs of starting up a new line of business, and significant organizational improvements.

FMM talks about your planning processes, not your accounting and tracking systems. It explains exactly how these processes should work to produce a clear definition of your products and services with an estimate of the full cost of each—presented in your budget, allocations and rates.

How Full Costs Help

It's not tough to see how knowing the full cost of all your products and services solves the critical resource-related issues listed above.

  1. Budgets fund products (projects) and services—deliverables that are justifiable—with complete financial transparency.
  2. When spending must be reduced, the business must decide what it won't buy from you.
  3. Everybody understands what the budget does and does not pay for, effectively managing expectations.
  4. Portfolio management processes become a matter of "writing checks" for specific deliverables from a well defined checkbook.
  5. Your costs are understood in the context of the value delivered, and clients know what they're getting for their money.
  6. Your costs are fully comparable to outsourcing and decentralization at two levels: You can compare deliverables item by item; and for each deliverable, your costs don't include anything a vendor doesn't include (like Subsidies and Ventures).
  7. Allocations are based on true cost and utilization, and chargeback rates are fully defensible.
  8. Clients control the costs of things clients choose to buy (products and services), not your indirect costs that only you should decide.
  9. Governance processes are simple and straightforward: clients simply decide what they will and won't buy from you.
  10. Your cost include appropriate levels of funding for critical sustenance activities, like training and client relations.
  11. Teamwork is enhanced when entire project teams are funded (not just the internal "prime contractor") and support staff are adequately funded through the indirect costs built into product/service costs.
  12. Customer focus is greatly enhanced since staff know exactly what they're selling to whom, with a clear product/service catalog that describes only things clients can choose to buy.
  13. Your managers think like entrepreneurs, take responsibility for their businesses within the business, and learn how to plan a business.

Five Levels of Maturity

Nobody said that knowing your full costs is easy. FMM defines all the detailed processes and mechanics involved. But the neat thing about a maturity model is that you can start simple and then evolve over time.

FMM defines five levels of maturity:

Level 0: Traditional Budgeting—Costs are not linked to products and services. This is where most of us are today.

Level 1: Transparency—Costs are linked to high-level product sets, and the cost model is transparent—that is, well documented and based on consistent principles.

Level 2: Fair Allocations—Products sets are subdivided by client (business unit), documenting utilization as a basis for allocations.

Level 3: Demand Management—Product sets are broken down into detailed products and services—specific client purchase decisions—for the purpose of portfolio management.

Level 4: Accuracy—All indirect costs are amortized to just the right products and services, and accuracy is improved.

Level 5: Rates—Costs are portrayed in total for products and services, and unit prices (rates) are extracted from the same data.

Caution: Just because you "do allocations" doesn't mean you're at Level 2. Similarly, an organization that has implemented portfolio management may or may not be at Level 3, and an organization that has implemented chargebacks may or may not be at Level 5.

Current practices such as these dictate the target level, but the organization may or may not have satisfied all the detailed requirements of that level.

Using FMM, you can measure where you are, figure out what level you need to be, and analyze the gaps to figure out exactly what you need to do to solve those nasty resource-related problems.

What to Do

If one set of internal processes can solve so many pain points, and if the path forward is well defined and feasible, why isn't "full cost" a buzzword on the lips of every CIO? It should be.

So let's get some buzz going about our own business processes and the Full-Cost Maturity Model.

Click here for a version of this article on the author's website, with links to relevant white papers, books, and other resources.

Dean Meyer coaches CIOs on organizational, political and leadership issues. He listens, and offers perspective with his compelling business-within-a-business paradigm and the common sense built over 35 years in the IT industry. He works with you to plan practical solutions, drawing from a wealth of implementation experiences and proven systemic change processes. For a no-obligation get-to-know-you chat, contact his office at ndma@ndma.com or 203-431-0029.

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