As the first big discussion on the Apptio blog, let’s lay it out there: What is IT Cost Optimization?

IT Cost Optimization helps IT departments make better decisions about how they run IT by tracking all cost drivers within IT and allocating those costs to an IT Service (or application or Line of Business) in order to understand the fully-loaded, total cost to deploy and maintain an IT service and the major cost drivers within. “You can’t manage what you can’t measure” and better visibility into the cost structure and cost drivers enables IT managers to better manage costs.

With an accurate model of the Total Cost of an IT Service and related cost drivers, and a data analytics engine to crunch and spin the numbers, IT managers can identify new opportunities to reduce cost, analyze which new IT projects will provide the highest ROI, provide allocation or chargeback reports to Line of Business (LOB) managers who own an IT budget, improve forecasting and budgeting accuracy, monitor IT utilization, usage and other performance metrics as a “CIO dashboard”, benchmark costs against industry averages and drive a Demand Management discussion with business leaders to ensure alignment with business goals.

The EMA analysts are talking about it as part of IT Governance and others see this as an integral part of Business Service Management (BSM). The ITIL v3 framework has a section on Financial Management. IT Cost Transparency solutions are designed to deliver on those ITIL guidelines. And based on their presentations at IT Financial and Asset Management Summit and Data Center Summit, Gartner sees this is a hot topic.

But let’s look at this from a user’s perspective. One customer, a senior VP at a Fortune500 Wall Street firm, wanted the ability to do 3 things:

- Understand at a granular level exactly how much it costs to deploy an IT service and what the major cost drivers are.

- Benchmark their IT cost metrics against industry averages to see how they are performing and where there is room for improvement.

- More accurately and quickly calculate the ROI for new IT projects.

- Create an IT cost allocation process, whereby the costs of IT services are allocated to a business unit, such that business managers would understand how their IT dollars are being spent and could make decisions around whether those were the best use of their IT budget.

 

On the first pass—Let’s call him Mike—built an allocation model that took into account all software costs, hardware costs, maintenance, support, data center facilities costs, warranties and overhead, in order to get a comprehensive cost per service. Great pains were taken to ensure that costs were allocated appropriately. For instance, network costs and previously been allocated on an even percentage. But with a proper model in place, Mike was able to ensure that network costs were allocated on a per port basis, and the Intel servers were only allocated the two ports they used versus the larger Unix systems that were taking up 8 ports.

Support is another often misallocated, but significant cost driver. A good, relatively real-time Cost Transparency solution should be able to take feeds from help desk systems in a way that allocates support tickets to their specific IT Service. Often we find that support costs are a significant driver in IT service costs, and that different applications require vastly different resources to support. This can be a highly advantageous place to look at reducing costs through more appropriate training and resource allocation of support labor (automating some tasks and moving L2 support to L1.)

In parallel, Mike identified a dozen IT metrics he wanted to track and benchmark against other IT organizations in the financial services sector to get a better sense of how his IT organization was faring compared to others and where they might have room to improve.

With that in place, Mike started to analyze the ROI of some proposed IT projects to get a clearer understanding of their impact and value to the company. Using the existing cost structures and some “What If” scenario planning—the ability to change some costs in the model to represent the cost structure post-project—Mike was able to compare costs side-by-side, along with implementation costs and value perceived in order to make a much more comprehensive and compelling proposal.

Finally, and possibly with the most impact to the business, Mike created Bill of IT reports for each business unit manager, which illustrated the cost breakdown of each IT service ordered, on a per user basis. This transparency fostered both a higher level of trust between IT and business managers and a discussion on which business services were providing a lot of value, and which might be targets for cutting—a process known as IT Demand Management. This process is one of the quickest ways to reduce cost in IT, but also realigns resources with the most valuable IT projects.

OK, that was borderline marketing-speak. But this is my view on IT Cost Transparency, the problems it solves and the benefits it provides. I’d be interested to hear comments on the challenges they are seeing in this space and how they are tackling them today.