Rightsizing Service Cost Models, Part IIUse these applied techniques from ITSM Watch guest columnist columnist Frank Bucalo of CA for designing effective and efficient cost models.
In my previous article, I used the most
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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
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 costs. For example, one might know that, on average, a 10-pound bag of onions with an estimated cost of $X will yield Y sandwiches. Thus, the cost of each sandwich includes an estimated unit cost of $X/Y for onions, whether the consumer want onions or not. The fast food industry has determined that providing a discount for not using onions adds cost and
Next, they take unabsorbed overhead (e.g., rent, salaries, electricity) and distributed those costs across all cost items as a percentage uplift. Finally, they apply business logic to modify user behavior and perform demand management. For example, knowing that the profit on French fries is huge, they formulate special meal packages which induce their customers to buy fries by providing an embedded discount on sandwiches. Lets now apply similar techniques to our IT use case.
Direct Cost Elements
In the case of our IT scenario, we probably have services that utilize dedicated resources. These cost elements are simply assigned to the services they support. This might include dedicated physical servers, software, hardware and personnel.
Easily Measurable Indirect Cost Elements
This might include resources such as the mainframe. Since the mainframe was created to manage a shared resource, usage accounting mechanisms were built in and have bee used by most organizations for over 40 years. Although UNIX and other distributed environments are similar, applications have to be instrumented correctly so that usage by service is captured.
For example, if your applications all run under the super user ID, you will not have the metric data required for accurate apportionment. Network environments are similar, where DHCP is used and not configured in a manner to allow mapping of usage data to specific services. Cost elements that are not easily measurable can be left unabsorbed or absorbed using a proxy metric.