For starters — and it has been said before — IT needs to operate like a business. This means that IT must have an understanding of the costs associ-ated with delivering business services. Most people expect to see itemized costs when they get a bill from a service provider. Your business constituents have the same expectations. They, too, would like itemized costs for the services that your IT organiza-tion provides.

what is service Cost Management?Service cost management is the discipline of plan-ning, tracking, and modeling the costs of providing services to the business. It fundamentally answers two questions:

» What does it cost IT to provide the service? » What is IT charging customers for consuming

the service?

The ultimate goal is to provide customers with a business-oriented view of these costs. Yet, in order to determine the “cost of goods” to provide business services, IT managers need to understand all the underlying technical and shared services required

to provide those services. That means understand-

ing costs across all aspects of IT: assets, labor,

projects, vendors, and more.

With service cost management in place, IT can go

beyond business alignment. Service cost manage-

ment enables you to compare and defend the cost

of services and make informed economic decisions

about the underlying components of services in a

way that is transparent to the customer. You can use

that information to compare the costs of services in

your portfolio, compare those costs to industry stan-

dards, and share this information with the business.

With this approach, IT can understand the costs of

providing services and can evaluate the costs of

goods related to those services. This enables IT to

make informed economic decisions about the

underlying technical services. In addition, service

costing enables IT to provide full transparency to the

business and to explain the total cost of ownership

(TCO) of the services that IT provides. This includes

hardware and software costs, as well as the cost of

labor, new releases, and other associated items.

IT organizations increasingly strive to become strategic partners with the business. Being

a partner, however, requires IT to do more than simply lower costs and increase service.

To become a partner, IT must also deliver and demonstrate its value to the business every

day. But how?

How To AnAlyze THe CosT of I.T. servICes By Karen Garcia, Information Services & Technology Chief of Staff, and Tony Navarrete, Principal Product Marketing Manager, BMC Software

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Your business customers want to know what each ser-vice costs and how their consumption of each service will affect their line-of-business budgets. As informed consumers, they are better able to make appropriate technology decisions about their business processes. With this essential information in hand, the business will gain a better understanding of the value IT provides. IT managers can also use this information to compare costs across business units and proactively make rec-ommendations to the business for improving services and reducing costs.

Here’s an example: When one company merges with or acquires another, the IT organization has to manage an expanded infrastructure. Some applications used by the acquired company may be redundant with other ap-plications in the acquiring company’s infrastructure. Others may be homegrown and difficult to maintain. With service costing, both the business and IT are able to make informed decisions about how to address du-plicate or redundant applications and infrastructure. So, rather than simply jumping to the conclusion that one solution is better or more cost effective than the other, the business has the information needed to make an informed choice between consolidating applications; maintaining older, customized applications; or moving to new, packaged applications.

Service costing also enables you to quickly conduct cost modeling and “what-if” analyses. You and your business counterparts can review these analyses as a tool to make important decisions regarding issues, such as, “Should we replace system A?” or “Should we outsource application B?” Ultimately, effective service costing can help you reduce IT spend by one to five percent as a result of increased efficiencies and reallo-cated labor.

five Dimensions of Cost Management at bMCAt BMC, in addition to the traditional financial manage-ment approach, the IT organization has adopted a service cost management approach to better explain to business customers the total cost of ownership of the services provided by IT. By analyzing and managing costs in five dimensions, BMC IT presents its internal customers with a snapshot of the overall value IT pro-vides, beyond just keeping servers up and running. These dimensions represent different perspectives of cost information. In fact, IT costs are included in some of the line items on the annual report for BMC. Let’s take a look at these different dimensions.

Each month, BMC executive management reviews IT expenses by rolled-up, natural accounts and looks for any variances. This is Dimension 1 of our financial costs. These high-level cost summaries are provided by cor-porate financial planning tools. Undoubtedly, if there are any variances, executive management wants to know why, but at this high level there is not enough informa-tion to enable IT management to identify the causes of the variances.

In Dimension 2, costs are further broken down into cost centers, each of which has IT owners. IT management reviews this level of expense to look for any variances. This information is also provided by corporate financial planning tools. However, regardless of whether or not the IT cost center owners are able to see the variances, they still do not have the capability to understand the detail behind the variances in the reports at this level.

Previously, these cost center owners would go to the accounting department to get a list of all general ledger transactions within the cost center and try to narrow down which transactions out of thousands might have caused the variance. Today, BMC IT uses the BMC Financial Planning and Budgeting solution, which pro-vides the capability to do budgets at a line-item detail level, along with actual transaction matching to see exactly which transactions are not aligned with the budget. This process saves cost center managers a significant amount of time in understanding and ex-plaining budget variances, while also allowing for more accurate forecasting as well.

In Dimension 3, using the same financial transactions applied to the financial planning and budgeting solution, we move toward defining the cost of IT services. In this dimension, we use the BMC Service Cost Management solution to redistribute the detailed financial manage-ment costs to align to the business and shared services defined by the service catalog. BMC’s service catalog

Your business customers want to know what each service costs and how their consumption of each service will affect their line-of-business budgets.

consists of 12 business services and 7 shared services. Research and development, sales automation, finance automation, data center operations, and business intel-ligence are examples of a few of the services defined in the catalog.

Service models were created that define and align each group of costs (e.g., asset, labor, vendor service, and project) to each service and apply consumption metrics to allocate the costs to the services. The service cost information, which is available by quarter and year-to-date, includes the actual service costs compared to the service budget. By using the BMC Service Cost Manage-ment solution, IT managers achieve insight into the resources and costs for providing IT services for which they are responsible. Managers can also model service costs and cost drivers, collect cost and consumption data, and compare the charges against industry bench-marks based on data from 8,000 companies in 23 in-dustries across four major geographies.

In Dimension 4, all shared service costs are allocated into the business services provided by IT. Costs are alloca ted across business services using different pa-rameters or consumption metrics, such as headcount, timecard percentages, or even server usage. In this di-mension, the business service now contains the full cost of ownership and is what is used in cost discus-sions with business service stakeholders. Although in some cases a cost center may fully align to a business service, at this point, the cost center/natural account is no longer a factor in providing the business service cost.

Dimension 5 allocates the costs of each business ser-vice to each of the BMC business units. IT can provide a detailed “IT bill” to each line of business, specifying exactly which services are being charged to the busi-ness unit. Again, the analysis allows a comparison of actual expenses to budgeted expenses.

The BMC Service Cost Management solution shares one core database and information with other BMC IT cost transparency-oriented solutions. This becomes a distinct

advantage for IT since the financial planning and bud-geting solution uses the same financial data as the service cost management solution, therefore ensuring that the information being delivered from service cost-ing is credible and consistent with the finan cial reporting in the business. This reporting, based on service cost management, has enabled BMC’s IT organization to become a true partner to the business.

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A service catalog is useful only if the users can easily understand the service offerings in it.

Business Service Management (BSM) is a comprehensive approach and unified platform for running IT. BSM solutions from BMC can help IT organizations improve service costing by leveraging an integrated set of tools and processes for project, financial, portfolio, supplier, and demand and resource management. This enables IT managers to do the following:

» Manage projects for defining, building, and rolling out new services » Establish and manage a service portfolio » Understand and optimize the financial cost of delivering services based on business value » Manage vendor performance » Simplify compliance reporting and enforce relevant policies and regulations » Track and map staff skill sets to projects and tasks to ensure the most effective use of available talent

The five dimensions of IT Cost Management

BMC, BMC Software, and the BMC Software logo are the exclusive properties of BMC Software, Inc., are registered with the U.S. Patent and Trademark Office, and may be

registered or pending registration in other countries. All other BMC trademarks, service marks, and logos may be registered or pending registration in the U.S. or in other

countries. All other trademarks or registered trademarks are the property of their respective owners. © 2010 BMC Software, Inc. All rights reserved.*180219*

About the AuthorsAs Information Ser vices and Technology (IS&T) Chief of Staff at BMC Software, Karen Garc ia leads the strategy, definit ion, and implementat ion of IS&T internal business manage-ment practices. She joined BMC in 1993 as a business analyst and progres-sively advanced to senior manager of IS&T Order Services, senior program manager of Sarbox Compliance and M&A Strategy, IS&T Customer Support account manager, director of the IS&T Program Management Office and, most recently, IS&T chief of staff. Garcia has more than 25 years of IS&T business and project management experi-ence. Prior to joining BMC, she held various IT positions at ExxonMobil and Shell Oil. She holds a Bachelor of Arts with an emphasis in accounting and management information services from the University of South Florida.

Tony Navarrete is a principal product marketing manager at BMC. He focuses on IT cost transparency, which provides CIOs and IT leaders with the visibility and control neces-sary to improve business a l ignment , inte l l igent ly manage IT costs, and deliver high business value. In this role, he brings a unique combination of in-depth product expertise and real-world IT experi-ence. Previously, Navarrete was the product manager for the IT Business Management Suite at ITM Software, where he drove the development solutions and defined the vision for integrating the suite into the BMC product family. He has more than 15 years of experience in IT and has held director positions in several IT areas, includ-ing customer support, networking, and the CIO’s office. As an IT director at Stanford University, he led a 60-person, fee-for-service desktop and server support division. Navarrete holds a Bachelor’s degree from Stanford University.

business runs on i.t. i.t. runs on bMC softwAreBusiness thrives when IT runs smarter, faster, and stronger. That’s why the most demanding IT organizations in the world rely on BMC Software across both distributed and mainframe environ-ments. Recognized as the leader in Business Service Management, BMC offers a comprehen - sive approach and unified platform that helps IT organizations cut cost, reduce risk and drive business profit. For the four fiscal quarters ended September 30, 2010, BMC revenue was approxi-mately $1.96 billion.

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strategies for successThe following recommendations will help you get started with service costing and achieve your desired results:

1. understand each business unit’s strategy. To be most valuable to the business, IT needs to understand what the business unit wants to accomplish over the next 12 months. By assigning an account executive to each business unit — one who collaborates closely with the executive level manager of each unit — you can ensure that IT is contributing and helping the business meet its strategic goals.

2. Define your service catalog so it makes sense to the business. A service catalog is useful only if the users can easily understand the service offerings in it. Be sure that your services are defined in language that your business users can relate to and comprehend. Keep your business engaged during the process of defining these services to ensure their support when the service definitions are complete.

3. Define and identify the costs. The business needs to understand exactly what they’re paying for. Focus first on defining the cost data for the business and then define and cost the technical services.

4. start with estimated percentages for each business service’s allocation for shared services. When allocating shared services across business services, its fine to start with estimates and then move to more sophisticated consumption metrics and cost allocations as your process matures. This same concept applies for allocating the business services across the business unit or line of business.

5. Align work entities to business services. Each work entity needs to be aligned with one or more business services. This includes incidents, problems, changes, assets, timecards, projects, and so on.

6. Automate to increase efficiencies. Look at areas where you are providing information to the business users based on costing information gleaned from multiple spreadsheets and e-mails. Then consider leveraging a solution to consolidate this information and provide it via automated reports and dashboards.

Show customers what their service actually costs and make recommendations for improvements. BMC used service costing to create an “IT bill” for its business customers. The results were com-pelling. For example, one business customer learned that his group’s service represented one of the highest costs in IT. His group was continuing to use multiple legacy applications to handle a business process that could be combined into one application. This situation required high-level support individuals to maintain the applications and additional hardware and software costs. By using service costing, IT was able to identify the total cost of ownership — both with and without the legacy system — moving the business to shut down the legacy technology. IT is now having higher-level strategic value discussions with the business rather than the “what have you done for me lately” types of discussions that were once common.

the business and it PartnershipService costing is a critical part of becoming a true partner with the business versus merely being an order taker. When you engage the business, begin the conversation with how IT can proactively help the business lower costs and improve service. Then, develop service costing scenarios to enable IT to become a strategic partner using “what if” capabilities to help build business cases. Before long, the business will see the many ways in which IT is a critically important element in driving business profit.

For more information, visit: www.bmc.com/products/product-listing/bmc-service-cost-management.html.