Discover Performance

Service-based costing provides the vocabulary that will let IT communicate its value to the business.

One reason SaaS providers have made gains with the business is that they’re better than internal IT at communicating their value and costs. So to reestablish its expertise and leadership in business services, IT needs to think and talk like a SaaS provider. Getting there requires a shift to a service-based costing model.
 
To appreciate how SaaS providers communicate to the business, just look at a SaaS provider’s terms and pricing. SaaS providers describe their services unambiguously: “customer relationship management,” for example. They’ll express the service cost in dollars per month, usually based on the number of users. And then you may see a list of features, benefits, and SLAs. It’s clear, simple, and in terminology the business understands.  
 
IT organizations tend to have a hard time with this. The problem usually stems from how IT organizes itself internally, how it manages its own costs, and how it allocates and communicates those costs to the business. Any business needs to sell itself in terms its customers understand. That includes speaking the language of your internal business users.

IT’s fragmented sense of self

The first part of the problem is that most IT organizations have different teams for infrastructure (sometimes even different sub-teams for servers and storage and networking), applications, and the help desk. IT organizations tend to manage and track financials according to these different parts. That might seem logical, but it produces silos within IT, creates multiple IT cost centers, and hinders IT’s ability to operate in a truly service-oriented manner.
 
This leads directly to the second part of the problem: how IT allocates and communicates its costs to the business. IT typically charges the business separately for each component part the business consumes (storage, servers, applications, help desk calls, etc.). This approach perpetuates IT’s stigma as a cost center and hinders its ability to “gain a seat at the table.” Further, it encourages the business to look externally for IT services; hence the popularity of SaaS providers.

The business wants services, not IT

The business doesn’t consume IT in component parts. The business consumes IT as a business service—or wants to, anyway. IT can fix this problem by moving to a service-based costing model. Service-based costing is the process of “rolling up” all the direct and indirect costs of an IT service, and then charging the business for whatever portion of that overall service cost it incurred. 
 
For example, if your business service is CRM, you’d start by capturing all the IT costs necessary to run the applications that comprise your CRM service. Then you’d add these IT and infrastructure costs to the cost of the applications that comprise your CRM service. This gives you your business-service cost, which you would then allocate to your respective business units based on how much of the CRM service they consumed. The business understands its IT costs clearly, because IT costs are shown as a business-service cost, with clear markers explaining what the business got—the number of users who accessed the application, an agreed-upon percent of the application cost, etc.

Put the focus on value

There are many benefits to service-based costing, particularly given the increasing prevalence of cloud and SaaS providers. (Get more details from our Exec In Depth Q&A with HP Software strategist Myles Suer.) First and foremost, service-based costing allows IT to more effectively communicate its value and costs. It allows IT to position itself as a provider of business services—rather than IT components, which to the business doesn’t equate to value. And it facilitates the dialogue between business and IT to jointly evaluate projects and make the right trade-offs between cost, quality, time-to-market, and service availability.
 
Additionally, service-based costing enables IT to position itself more competitively against external SaaS providers, as well as figure out which services it is comfortable outsourcing, a first step to becoming a “service broker.” This is because IT can compare its costs and value to a SaaS provider’s in a more “apples to apples” manner. This would allow IT to point out why a SaaS provider’s costs are lower, because perhaps it’s not charging for help desk support or the network.       
 
Additional benefits of service-based costing:

• Provides better transparency on IT costs, value, and risk
• Helps IT speak the language of business and participate more fully in budget conversations
• Enables IT to refocus the conversation on IT value, rather than IT cost

If everything IT does is in service to the business and its goals, then it’s time IT truly commits to being a service-oriented organization. That starts with IT managing its internal operations as business services, not IT components and cost centers. Take care of that, and the “talk like a SaaS provider” part comes easy.

For more on understanding and maximizing your IT investments, check out our IT Financial Management page. Get more on bringing industry best practices to your IT team on our IT Service Management page.