Rightsizing Service Cost Models, Part II

Unabsorbed Cost Elements

Determine which cost elements remain unabsorbed and identify potential proxy metrics for their apportionment. Proxy metrics can be derived any number of ways. The above example uses a statistical proxy—average cost of onions per sandwich. An IT-based metric might be the average number of database transactions per HTTP request. In this case, HTTP requests can act as a proxy to represent the number of database transactions, network usage, and application server usage.

This would eliminate the need for real-time monitoring across those components of the distributed environment. Another example would be to use transactions against the virtual environment (e.g. the same HTTP request) as a proxy for usage of the physical environment, thus eliminating another level of real-time monitoring.

Allocate Remaining Unabsorbed Costs

Remaining unabsorbed costs might include accommodation and supervisory salaries. Metrics to allocate these costs can include the number of services, or the number of users of the service or even a proportion derived from the apportionment of all direct and absorbed costs.

Apply Business Logic

Having formulated a hypothetical cost model, you will want to rationalize the model against the objectives of your business. For example, it might seem wise to allocate resource costs for a service desk application running on a virtual environment with an actual usage metric.

But when you consider that the service desk was added to increase user productivity, you might decide  it is in your company’s best interest to treat usage as an unabsorbed cost. Otherwise, as those costs turn into charges, you might dissuade users from utilizing the service desk, thus reducing their productivity.

Another example would be to determine that the benefit of measurement does not warrant the cost. Again, in this case you might elect to treat and indirect absorbed cost as an unabsorbed cost, using some high level metric as a proxy. In order to ensure you are aligned with the business, you need to discuss the model with the appropriate business managers.

Summary

There are a number of techniques to allocate costs to services. Each has its merits. Start as simply as possible. Take a top-down, business-driven approach. Add complexity only when it provides proportional benefit. This will lead to cost models that are simple and manageable. In our next articles we will turn our attention to service level management and how service level compliance measurement can be rightsized.

Frank Bucalo is a senior architect at CA. Frank has more than 20 years of experience implementing business applications for the Wall Street community. Over the last five years, Frank has a track record of successfully delivering ITIL implementations – from business analysis, through intelligent design, and technical implementation.