Hard-to-Measure IT Costs Case Studies
Exhaustive research of the public domain indicates that there are no case studies available which analyze use case examples of IT cost allocation models for shared services, for specific companies. This may be because cost allocation for operational costs is an internal process, and there is little benefit to a company in publishing their models in use. Deeper research discovered a few resources which provide brief, non-technical overviews of cost allocation strategies for IT shared services, which range from 'even spread' (the most generalized) to 'activity-based costing' (the most granular). However, it should be noted that the only resource which performs a deep dive analysis of the subject, as opposed to an overview, is a 2010 pay-to-view report from Gartner. Below you'll find our methodology and relevant findings.
We began by researching for case studies on chargeback, shared services, total cost of ownership, and IT cost allocation for shared services - both for Fortune 500 companies and more generally - but this strategy generated no relevant results. As shared server cost allocation is your primary area of interest, we research specifically for case studies, reports and articles on this subject, but this also did not generate any analyses specific to servers. Our research did discover several articles and reports that provide a brief overview on the available models of IT cost allocation for shared services, which covers shared servers by inclusion. As this is the most directly relevant information available, we have provided an analysis of it below, based on the overview information available. It was not within scope for a single request to perform deep dive research on each model; but we would be happy to continue that research as a separate request.
Please note that, due to the limited amount of information on this topic from credible sources, our source dates range as far back as 2010. However, we assume this is still relevant information, as it appears that neither the cost allocation models nor the conversation around it have changed much in that time.
IT ALLOCATION COST OVERVIEW
The range of IT cost allocation for hard-to-measure IT costs is thus:
1. Even Spread: IT costs are spread evenly among all users, regardless of actual use.
2. Percentage-based: IT costs are manually assessed and allocated. This is based on and individual's subjective understanding of IT use across business units.
3. Weighted allocation: IT costs are allocated by consumption, using whole numbers instead of percentages.
4. Shared expense weighting: IT costs are allocated based on a unit's overall spend. For example, if Business Unit A spends 50% of the company's overall IT spend (i.e., that which is not included in shared IT costs), then it would also be billed 50% of the shared IT cost.
5. Activity-based costing: IT costs are allocated based on directly measurable use such as help desk usage, which can be measured per ticket.
allocation MODEL COSTS
Each model has its cost. At both the broadest and the most narrow ends of the spectrum, the cost is more extreme. On the broad end, 'even spread' or 'lump sum' allocation provides no meaningful connection between usage and cost, which in turn provides no motivation for users to increase the efficiency of their use of IT shared serves. On the other hand, granular activity-based models have significant back-end accounting costs. For this reason, the CIO Executive Board recommended as a best practice to "aggregat[e] IT costs into a relatively small number of [business-facing] service categories, such as network connectivity, desktop computers, laptops, mobile devices, e-mail and collaboration tools, financial systems, customer management systems, databases, and reporting tools." In this model, the categories correlate to the users' experience of IT usage, unlike the lump sum allocation model; and the accounting is more manageable, unlike the granular chargeback model.
1. EVEN SPREAD
The even spread model is useful for a company which is beginning to assess its hard-to-measure IT costs. However, as previously noted, it does not provide any motivation for behavioral changes relative to IT usage. It also does not provide any granular insight into usage patterns.
2. MANUALLY ASSIGNED PERCENTAGE
Both percentage-based and weighted models are consumption-based models. In the percentage based model, the use percentage is manually assigned for each category. This assumes that the personnel making the cost assessments are doing so accurately. However, even if the cost allocation isn't correct relative to its true cost, it still offers a standardized method for cost allocation that is consistent across units and categories.
3. MANUALLY WEIGHTED ALLOCATION
Weight allocation is also a consumption-based model, but its foundation for allocation is user/unit consumption based on the number of assets (such as servers). This model is particularly useful for encouraging user/unit consumption accountability.
4. SHARED EXPENSE WEIGHTING
Shared expense weighting assumes that the percentage of the company's total IT spend attributable to a given unit is commensurate with the shared IT cost used by the same unit. One primary benefit of this model is that it uses easily available and hard data on consumption; and it is simpler to calculate than the percentage-based model.
5. ACTIVITY BASED COSTING
Activity based costing utilizes per-use data to determine usage share. This is most feasible for activities that already generate traceable usage data; although, as noted above, the back-end accounting for this method can be significant.
6. MIXED-USE STRATEGY
Multidimensional strategies use two or more of the above models in tandem, which produces a weighting based on multiple data points. This is clearly the most complex model, and requires both strong data sets and the technological capacity to combine them.
The 2010 Gartner report 'IT Chargeback and Cost Allocation' examines "hot topics and best practices in IT cost allocation and chargeback, as well as ongoing chargeback research," and appears to be specifically oriented to the enterprise-level. This report is only available to Gartner clients.
To wrap it up: while extensive research indicates that case studies of multinational enterprise IT cost allocation for shared services are not available, our research did discover the six models of cost allocation currently in use, which range between static cost allocation, direct activity based allocation, and a variety of percentage and weighted consumption models.