IT Service Costing

IT service costing answers the question of what each technology service costs to deliver. Instead of looking at costs by type, such as salaries, hardware and software, it looks at them by service: how much does email cost, how much does hosting a server cost, how much does the service desk cost per ticket? To answer these questions, it assigns costs that belong directly to each service and allocates a fair share of shared costs, such as infrastructure, security and management.

Service costs are the building blocks of many IT financial management practices. They form the basis for unit costs, showback and chargeback rates, benchmarking, sourcing comparisons and decisions about which services to improve, consolidate or retire. For IT financial management, service costing turns a general ledger full of expenses into information that service owners and business leaders can understand and act on.

Definition of IT Service Costing

IT service costing is the application of cost accounting methods to calculate the total cost of providing each IT service over a period. It combines direct costs, which are traced to a single service, with indirect costs allocated from shared resources.

The result is the full cost of each service, which can then be divided by a measure of consumption, such as users, servers or transactions, to produce a unit cost.

Defining Services

Service costing depends on a clear list of services, usually documented in an IT service catalog. Services may be business-facing, such as a customer relationship management application, or technical, such as hosting, storage or networking.

Services should be defined in terms that their consumers recognize and should be measurable, with a clear unit of consumption. Defining too many services makes costing complex, while defining too few makes the results less useful.

Many organizations start with a few dozen major services and refine the list as their costing matures.

Building Up Service Costs

Costs typically flow in layers. General ledger costs are grouped into cost pools, such as staff, hardware and software; then assigned to technology towers, such as compute, storage and network; and then allocated to services based on how much each service consumes from each tower.

This layered approach, used in Technology Business Management (TBM), makes it possible to cost services consistently and to trace any service cost back to its sources.

Shared costs, such as security, IT management and facilities, are allocated using bases such as headcount, usage or direct cost, following documented rules.

Importance of IT Service Costing in IT Financial Management

Without service costs, IT leaders can say what they spend on salaries or software, but not what each service costs or whether it is efficient. Service costing provides the view that business leaders and service owners need.

It also supports many downstream practices.

As more services are delivered by external providers, service costing also provides the internal benchmark needed to judge whether outsourcing or cloud alternatives offer better value.

Unit Costs and Benchmarking

Dividing service costs by consumption produces unit costs, such as cost per user per month for email or cost per virtual server per month for hosting. Unit costs make it possible to track efficiency over time and to compare with external benchmarks and providers.

When a service's unit cost is much higher than benchmarks, it highlights an opportunity to investigate, which might lead to consolidation, automation or a change in sourcing.

Tracking unit costs over several years also shows whether efficiency improvements are being achieved and sustained.

Showback, Chargeback and Decisions

Service costs and unit rates are the foundation of showback and chargeback, which tell business units what their consumption costs. Accurate service costing makes these charges fair and defensible.

Service costs also support decisions about retiring low-value services, rationalizing applications and comparing internal delivery with cloud or outsourced alternatives on a like-for-like basis.

For service owners, knowing the full cost of their service creates accountability and a basis for improvement.