Thought Leadership & Tools

ITFM Pathway to Success: Step 5 – Service Costing & Benchmarking

An easy-to-follow framework for implementing an effective IT Financial Management (ITFM) program.

By Pete Hidalgo, Chief Customer Officer at MagicOrange

MagicOrange has designed an ITFM framework to guide decision makers through a step-by-step process to help them manage the finances of the IT organization. The MagicOrange ITFM Pathway to Success was specifically designed for CIOs, CFOs, CTOs and their respective teams.

However, to achieve the true benefits of this framework, business leaders need to follow a series of planned and measured steps. The MagicOrange ITFM Pathway to Success has to be executed in a methodical manner over a period of time, by implementing ITFM processes and best practices.

The Step 1 in this process is to assess and plan. Businesses need to review the IT strategic plan, the current and future goals and objectives, and determine how it aligns with the business strategy. IT services then need to be defined in Step 2, to ensure that the charges for these services are transparent and that the business understands them.

The next Step 3 in the framework is to ensure high quality service consumption and cost data in order to achieve cost transparency and ultimately, implement showback / chargeback to the business.

Before proceeding to Step 5, organizations need to automate their processes. This will help increase transparency into service usage and costs to efficiently produce financial and service consumption reports. It will also ensure self-service reporting and data access to customers so that they can understand and regulate their service consumption and costs. Automation will help organizations perform monthly chargeback and bill of IT generation, as Step 4 of the process.

Step 5: Service Costing and Benchmarking

Service Costing is the process to determine the unit service costs of each IT service being delivered. Unit service costs are required in order to implement chargeback, where each consumer of IT services will be charged for that consumption - based upon the unit service costs and quantity consumed.

The MagicOrange Service Costing Framework shown below, will be used as a reference for analyzing and determining service costs. Once costs are calculated, one can proceed to the benchmarking step.

Key dependencies to perform service costing:

  • Services must first be defined
  • Good consumption data is required
  • Cost data that is aligned with services is essential
  • Effective chargeback implementation requires unit service costs

Benchmarking is a process where the costs of IT are compared to various industry standard benchmarks. This will help determine whether IT spending levels are too high, too low, or in line with the benchmarks.

Benchmarking is both an art and a science, where a deep understanding of how IT delivers services, who is consuming those services, and what the actual costs of delivering those services is required.

There are differences between benchmarking sources and multiple variables involved, such as how well the company maps to the defined industries more importantly, revenue levels defined by the benchmarking source.

The benchmarking results should be taken as a whole, to provide an indication of cost levels to drive further investigation and validation, before drawing conclusions and taking action to reduce costs.

Benchmarking key considerations include:

  • First start with high level benchmarks
  • Use multiple benchmarks to paint an overall picture of spend levels
  • Data inputs need to be normalized to map to the correct benchmarks

Guided by the MagicOrange ITFM Pathway to Success framework, customers can drive cost optimization throughout the organization by approaching savings initiatives systematically and holistically, from the perspective of both IT supply and business demand.

Ask the Experts

MagicOrange recognizes the complexity of the overall journey to ITFM maturity. Its experts will provide customers with a progressive cloud-based ITFM tool and professional guidance that brings full transparency into the value of technology in the organization.

Benchmarking is a complex process, one should seek the assistance of an experienced practitioner in benchmarking such as MagicOrange. Having an unbiased and expert benchmarking organization perform the data analysis and benchmarking will be very beneficial on a number of levels such as:

  • The results will be of a higher quality since MagicOrange has greater experience in benchmarking
  • The results will be viewed by as unbiased, since the analysis was done by an external third party
  • Considering the experience, the work should be completed much faster