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Rightsizing Service Cost Models, Part II

Use these applied techniques from ITSM Watch guest columnist columnist Frank Bucalo of CA for designing effective and efficient cost models.
Feb 28, 2008

Frank Bucalo


In my previous article, I used the most complex service I could imagine—a distributed Web-based application running in a virtualized environmentto illustrate that you cannot take a bottom-up approach to achieve fair cost apportionment in a cost-effective manner.


Instead, I recommend using a top-down approach; using the simplest method possible and then progressively drilling down until fair service costing can be achieved with a manageable level of effort. In this article, I will elaborate on that theme and provide some recommendations for drilling down. I will use a familiar example to illustrate how one industry has achieved optimization. Then I will apply the techniques to our use case.


Non-IT Use Case


The fast food industry provides us with an illustrative use-case: determining appropriate costing methods for a sandwich. First, note that they do not measure the exact time it takes to prepare and sell your sandwich (e.g., 35 seconds of cook time, 27 seconds at the register). Nor do they measure the exact amount of onions, pickles, and other condiments that comprise your sandwich.


Measuring onions and pickles for a single sandwich seems ridiculous, but this approach mirrors the naïve, bottom-up approach that many IT departments have pursued in costing their services. Instead, the fast food industry has used a number of techniques to “rightsize” their costing model. Those include determining which cost elements are best dealt with as being direct (e.g., number of sandwich patties, cheese) and which are best dealt with as being indirect (e.g., onions, pickle chips).


Next, they determine what cost elements are best dealt with as being unabsorbed. Many times a statistical proxy is used rather than actual measurements for apportioning absorbed and unabsorbed