What is IT Cost Allocation?
What is IT Cost Allocation?
IT Cost Allocation is ultimately centred around taking costs that originate in the IT department and packaging them into different products and services to demonstrate how they affect business costs. An organisation can utilise this information to “follow the money” and charge costs back to the departments that are consuming the item, fairly and accurately.
IT is prone to the misconception that it is a “black box”, an expensive, complex world of technology with millions of data points that cannot be controlled. Cost allocation helps remove this fallacy by giving users the necessary tools to generate a commercial awareness of their products and services. Moreover, this process can deliver insight into how those products and services are consumed within an organisation.
The principal benefit of IT Cost Allocation is linking business units with the technology or IT departments. Bridging the gap between these two shared services by showing that technology can align with existing business strategies is imperative. Not only does this inform team members on how these services can be used in a responsible and commercially astute manner but being able to articulate what each service offers within the organisation, what they cost and who is consuming them is also greatly beneficial.
A secondary benefit of cost allocation is the transparency that it delivers to an organisation. We at MagicOrange often hear from our customers that people will receive a lump sum for technology spend with no breakdown or context associated with it. By conducting detailed cost allocation, users can segment that cost much like an itemised bill from a mobile provider, giving greater granular detail per line item.
Once those elements are visible, it is possible to avoid wasteful demand and alter overconsumption behaviours. “What levers must I pull, and which dials must I turn to be able to implement and change the bill that I receive?”.
What makes MagicOrange’s proprietary algorithm unique is that it can accommodate any cost model that is incorporated. Typically, people must begin with the General Ledger when trying to construct their cost allocation, yet MagicOrange can help you start from the business/consumer side to work back to the technology. Depending on the data, organisations could benefit from IT Cost Allocation within one-to-two weeks.
Improper implementation of cost allocation models can lead to business challenges. However, from the outset, it is crucial to identify and define the different services that the technology provides to the stakeholders within an organisation. If data associated with those services is incomplete – such as the costs, the components, and the consumption - then the result will also be incomplete.
Similarly, rushing the planning and execution of cost allocation models will result in business challenges. People want to get results as fast as possible, therefore bypassing the chargeback to the General Ledger and delivering incorrect data to executives. The solution is to first do a show-back, then a chargeback to ensure that the data is accurate.
When entering new markets and networks, many businesses bypass the technology department. A Strong cost allocation process educates all stakeholders as to how much expansion will cost from a cloud and server perspective. This demonstrates the value that technology provides to support existing and new business strategies. Technology should be viewed as a partner to the business, rather than an expense centre or audit taker.
What makes MagicOrange’s solution unique?
MagicOrange will examine use cases and define the services that organisations want to see and measure within their business. Based on the client, MagicOrange can be deployed in a few hours thanks to the Customer Success team, consultants, and analysts. These teams work tirelessly to assist organisations on their IT Financial Management journey and improve their cost allocation models and opportunities by bringing data together and enabling the implementation to be done in a timely manner. The MagicOrange online academy is also available 24/7 for clients to research and learn more about the team and the platform.
If your organisation requires a business partner to support you on your IT Financial Management journey, the first step to success is to contact MagicOrange and speak with our team of experts.