Do companies really know their own IT costs?

In recent years technology spending has received increased scrutiny with ROI and total cost of ownership calculations becoming significant metrics in the spending approval process. Companies have gotten much better at making cost based decisions on the margin – for discrete purchases. However, once installed and running, technology costs can get rolled into a gross level budget number and discrete cost accounting can become questionable. Accurate cost information becomes important when making an outsourcing decision. How do you know what a good deal looks like if you don’t know what it is currently costing you for the same function?

It seems that it would be easy to know what you are spending for a specific function. This is more complicated than it seems because decisions are generally made around business lines, but costs are often incurred around task-based functions like telecommunications, servers, space, etc. Given matrixed organizational structures, shared IT infrastructures, the evolution of virtualization technologies and corporate overhead allocations, it is often difficult to accurately determine the cost for a particular business line.

For example, what does it cost a major U.S. bank to operate its online banking services? Such a service may run on a rack of servers in the same data center as teller operations, deposit systems, loan systems, etc. They use the network connection to the Internet shared by many other applications and employees. The applications may be supported by a team supporting other applications like ATMs, credit cards or teller equipment. Customers may call the same call center for online questions as they call for questions about a checking account problem or a problem at an ATM. A customer might ask all three questions on the same call. Allocating all of these shared services costs to the online banking business line can be as much art as science. And outsourcing raises other questions about costs, including:

* If this were to be outsourced, how much should we expect to pay for comparable service levels?

* Wait a minute, do we have service-level agreements established internally? Are they comparable with what we would expect from an outsourcer?

* As a bank subject to federal examination, how will our costs of supporting examiners change if this service is outsourced?

* If the online banking function is outsourced, what expenses will actually decline (call center staff costs) and how much will still be on our books (data center floor space, servers, operators)?

The truth is many companies do not know their true costs or the potentially altered cost structure following outsourcing of a function. Three common problems are:

Understating costs – Forgetting to include all relevant costs can result in taking too hard of a line in the outsourcing negotiations. This might cause you to accept lower service levels to realize the expected savings. And yet the forgotten costs are still on your books and you are now paying too much in total for lower service levels. It might cause you to determine that outsourcing does not make sense and you could be missing a good opportunity to be cost competitive. This can be a big problem if your competitors do not make the same mistake.

Overstating costs – Adding in things that do not belong might lead you pay too much for outsourced services. A bad deal might look good if you over estimate your current costs.

Cost saving assumptions that do not come true – Often times resources such as space or staff are not reduced when a function is outsourced. These resources get assigned elsewhere or absorbed in other ways. It’s easy to say we won’t need Sally or Jeff if we outsource this, but somehow Sally and Jeff are still around after the deal is done. The outsourcing decision made sense if the costs really went away, but the trigger to eliminate these costs is never pulled. When evaluating an outsourcing decision, be sure you are ready to eliminate the resources in the cost saving column. If you are not, take them out of that column.

Those allocation metrics and those folks in accounting can be very important in making outsourcing decisions. It takes good information and good judgment to make good decisions. Cost accounting information is a key part of the required information.