Decision-Based Modeling


One of the main reasons organizations hit the transparency wall lies with fundamental flaws in the cost transparency approach, specifically in the design of the underlying cost model.  Cost models limit the focus to aligning costs to a defined set of services based on traditional IT architecture.  This approach came into fashion after Y2K when finance organizations were attempting to get IT costs back in line.

Cost modeling is not a new practice.  It has been used in manufacturing for decades.  Its roots are based on the premise that the supply chain tells us how much it costs to build and deliver an offering to the market, based on the cost of goods sold.  Decades of analytics and best practices have evolved around this costing approach.  One example is activity-based costing as a means to understand the labor elements required to manufacture a product.

The Dynamic Nature of Technology Requires a Unique Model

Cost modeling, supply chain management, and, in many cases, activity-based costing have all proven to be effective tools for manufacturing.  Technology, however, does not manufacture a physical, static product.  Many corporate finance teams have tried to apply manufacturing costing methods to IT because they look similar.  In reality, technology and technical delivery is nothing like manufacturing.  This is why these cost models or transparency models provide initial insights but stagnate over time.  Therefore business units quickly lose interest in the model.

Technology and technical delivery are dynamic and ever-changing combinations of users, consumption, configuration, deployments, and, if well managed, decommissions and depreciations.  This dynamic environment changes so rapidly that traditional cost models can’t even begin to capture and accurately reflect the costs. 

Another common attribute of cost models is a notion that to understand the cost of the end product, all the parts used to build it must be apportioned and accounted for, down to the thread count on the screws that hold it all together.  Again, a true statement for manufacturing.  Supply chain analytics rely on this tightly coupled relationship between parts used and units produced.  Again, however, technology and technical delivery are not manufactured, static products.

A Decision-Based Model

When costing technology, it is still required to know and identify all the parts.  The relationship between the parts, however, need to be more dynamic.  Our model needs to recognize the ever-changing relationship between the parts.  Further, the model needs to recognize intentional changes in that dynamic relationship, as well as unintentional changes.  At Proven IT Finance we call a model designed this way a decision-based model.  A decision-based model identifies the cost to deliver IT, as well as recognizing the more dynamic interrelation of the parts.  Visibility into this dynamic relationship gives a decision-based model the edge.  You can actually manage IT costs at the cost driver level.

Accurately.

 

Read other blog posts in this series written by leading ITFM expert William Miller: