Johannesburg, 20 May 2016
Cost transparency (CT) provides business, finance and IT owners with detailed and meaningful insights into their respective areas. It creates both visibility and understanding concerning the costs and volumes of the entire IT product and service portfolio of the organisation, enabling managers to make informed and fact-based strategic and tactical decisions around its IT investments.
One of the more significant outcomes of a well-implemented CT initiative is the ability to leverage the information it delivers into cost optimisation initiatives, says Magic Orange. Such initiatives could include everything from IT performance management to hardware and software management, as well as consolidation programmes, strategic vendor management and labour and personnel optimisation. Cost optimisation offers organisations a vast improvement on the standard cost allocation approach that is usually utilised by businesses.
Cost allocation tends to be very general, with costs simply rolled up and dispersed amongst the business units. In other words, shared service functions tend to be allocated on a pro rata or arbitrary basis - such as according to floor space or by headcount - with no mechanism or incentive to control costs.
Cost optimisation, on the other hand, offers a far greater level of transparency, allowing business users to make the correct decisions. Because cost optimisation offers a greater level of drill-down granularity in terms of which costs belong to which business unit and why, it creates a mechanism for business users to become genuinely engaged in optimising their costs.
Where enterprises have a proper costing model coupled with cost transparency, they will be able to revise their allocation system completely, as they will have increased trust in the numbers with which they have to work; they will be able to consider all the various components of a particular cost - for example, the additional costs associated with an individual employee's desktop PC, such as software licences, support expenses etc - and ultimately transform the conversation between business and IT.
This will allow the organisation as a whole to unlock greater IT value, as it will no longer merely be concerned with defining where a cost sits, but will actually be able to understand the value it derives from each and every cost centre.
In effect, you could describe the difference between cost allocation and cost optimisation in the following way: cost allocation is equivalent simply to filing books in a library. On the other hand, cost optimisation would be the process of scouring the contents of these books and making the relevant information available to the right people in the organisation so that they can make improvements in their areas of responsibility.
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