The Benefits of Service Cost Analysis

If you were to ask a typical organisation what its overall cost of IT is, you’ll usually get an answer with a reasonable level of confidence behind it. However, when it comes to questions regarding the cost to deliver individual services e.g. email, CRM, ERP etc. the response is typically quite different.

To some, services “cost what they cost” and regardless, each business-critical service has to be delivered, no matter what. This point of view is understandable, however in an environment of increasingly squeezed budgets – having to deliver more with less, knowing the exact cost structure of a service is arguably a fundamental piece of information to have access to.

If the overall cost of a service is understood and you can drill down to the cost of infrastructure, software and support elements, then a picture of where specific savings can be made begins to become clearer. For example by uncovering an area of overlapping support capabilities where there is inherently wasted cash.

To justify the exercise, a better place to start from could be derived from Simon Sinek’s book “Start with Why”. In his book and associated TED talk, Sinek suggests organisations (and individuals) focus initially on why they are doing what they are doing, rather than the what and how.

Why Service Cost Analysis?

  • Linking IT service costs and overall product profitability – i.e. where to focus investment. Identify which services to invest more in, which ones to retire
  • Overlaps and inefficiencies (reduce costs, carbon footprint etc.)
  • Gives insight into cost profile (Capex vs. Opex) and identify strategies and roadmaps for moving to a different strategic model
  • Service interdependencies (risk and cost)

As for lowering an organisations carbon footprint; this is becoming a more and more pressing matter and something which undoubtedly cannot be ignored moving forwards. A solid understanding of an organisations cost base for delivering a service to the business will inherently expose areas of overlap. These areas of overlap area immediately areas where the carbon footprint can be lowered – whether than be through workforce management (less staff = less travel for example), or the decommissioning of kit and the subsequent decrease in power, cooling and heating required.

When it comes to strategic decision making, this is not something that can be done without having all the relevant data to hand. Having performed a service cost analysis, senior management are able to actually make well informed decisions on how to adapt and plan for IT spend, which in turn allows them to more confidently and accurately report to shareholders on company performance – A large CAPEX spend could have very unwanted effects on quarterly financials – it’s a very different story though if there is an element of forecasting said expenditure. Moreover, by understanding the cost profile of a service, and subsequently the operating expense ratio, management can make a truly informed decision on the profitability and efficiency of the service.

And finally, let us not forget that it is has always been the case (and probably always will be), that the larger and more complex the organisation, the more valuable this exercise will be, because no doubt there will be an element of “the right hand doesn’t know what the left hand is doing” type syndrome occurring; And in a world where growth is always one of the golden mantras for any business, this will never change.