Cost allocation is an integral part of managing IT like a business. IT leaders can gain visibility into the fully loaded cost and quality of IT services, communicate the value of IT to business leaders, reduce cost without reducing quality, and align with business priorities through a collaborative budgeting and planning process. Strategically allocating your IT costs is essential to planning your budget.
The case for cost allocation
Most cost, quality, and operational data resides in separate asset, labor, performance and corporate finance systems. The challenge for IT leaders is using this data to manage its own operations, as well as reporting on the cost of providing its core services and capabilities to the enterprise.
Creating a cost allocation model
Aggregating and organizing the data to enable deep analysis and reporting on IT services requires an allocation model. An allocation model captures cost information, then flows that data from one logical group to another. For example, capturing the cost of an IT resource or asset, modeling the flow of that cost into various IT services, and from there modeling the flow of costs up to the business unit consumers of those services.
Most cost allocation strategies fall into six major categories:
- Even spread
- Manually assigned percentage
- Manually weighted
- Direct spend weighting of shared expenses
- Activity based costing
Stay tuned for my regular series every Friday that will lay out the best practice guide for each of the above strategies for effective cost allocation. You can read the entire white paper here.
Which IT cost allocation strategies have worked for you? Let me know in the comments.