Mike Gough, Manager, KPMG LLP and Jeff Gregoire, Director, KPMG LLP
Say the words “cost allocations,” and your audience immediately thinks “expensive,” “formulaic,” “not based in reality,” and maybe worse. Cost allocations are nothing new, but managing them correctly is. It’s the difference between providing a required service versus providing a value-based service with obvious benefits. With new options such as the cloud, shared IT services must have an even keener focus on allocating costs effectively and with transparent value in mind.
Cloud is changing everything
Today, organizations can effectively get around IT for a variety of activities using resources in the cloud. Software, infrastructure, backup, support, and others can all be handled by individuals and organizations in the cloud—often in minutes, paid for with a credit card.
Cloud gives users distinct advantages over many traditional insourced IT shared services:
- Usage-based pricing – Cloud systems typically provide services in a metered approach to resource utilization “by the resource, by the drink” (e.g., GHz of computing power, GB of storage, Mbit of bandwidth).
- Rapid Elasticity – Capabilities can be rapidly and elastically provisioned, in some cases automatically, to quickly scale up and rapidly scale down in an almost unlimited manner.
- The cloud user can monitor, control, and report in detail providing users with significant transparency as detailed information about usage is integral to the cloud business model.
Can your IT organization do that?
In our experience, users would much rather stay with the IT home team, but they readily assume they are paying too much for an inferior service. However, drill-down discussions reveal that, in many cases, it is the allocation of the costs, rather than the cost themselves, which drives dissatisfaction.
Users want to understand:
Pricing and charge-back transparency: What’s the methodology? Are there any additional expenses and overhead charges bundled in?
Value: Am I paying a fair price for the services I’m receiving?
Flexibility: How can I change requirements, such as consumption and service levels, to reduce my spending?
The road to allocation value
The journey to effective cost allocation is not quick. While it requires significant strategic planning, the benefits are many. Consider that mature service cost allocation:
- Allows customers to control the amount of services they consume and reduce the overall cost to the enterprise
- Provides better information for realistic sourcing decisions, including cloud options
- Enables better alignment between service cost and service performance
- Provides increased visibility into the organizational support costs
- Delivers an expectation and framework for continuous unit cost financial improvement
- Provides reliable cost forecasts
- Enables optimization for tax/credits and tariff accounting treatment
- Allows timely reporting to spot and correct negative financial trends
- Provides better communications between enterprise service and customer organizations
With transparency, user groups will have greater insight into your offerings and your price structure. However, if you treat them like a customer and a partner, they will work with you to reduce overall cost and waste in the organization. Put it all together, and the enterprise can gain significant value that positions IT and its constituents in line with the business strategy and plan.
In one of our recent Pulse surveys, only 15 percent of IT respondents identified chargeback structures as a key success factor within their organization. Eighty-five percent hadn’t acknowledged or implemented a clear cost allocation methodology. At KPMG, we have helped companies move to allocation maturity and transparency.
We invite you to read more about issues related to IT Cost Allocation in the KPMG whitepaper: Transforming Cost Allocation for Information Technology Services.
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