ITILITIL Cost : When these are completed we will then construct our ITIL….

Trademarks: All trademark names are property of their respective companies, some of which are mentioned below: ITIL® is a registered trade mark of OGC (Office of Government Commerce-UK).

Site: http://www.ogc.gov.uk/ CCTA: Central Computer and Telecommunications Agency (part of the UK Treasury Ministry) Site: Kenneth J.

DeOre Sr. Copyright © The Art of Service. Page: 1 Preface The Using ITIL Financial Management to Develop Cost Catalogues for IT Service Delivery and SLA Pricing White Paper represents a comprehensive methodical approach to use ITIL based disciplines and lower level CI (Configuration Items) to develop a solid Costing approach to IT Services at their inception and track those cost adjustments throughout the life of the IT Service using ITIL service delivery and support processes. develop our IT Costing Catalogs, describe the common cost areas (CCAs), build our allocation cost matrix table, described how incoming users plays a significant role in our efforts, complete a annualized financial analysis and finally developing a Yearly User Unit Price value for our sample IT Service.

When these are completed, we will then construct our ITIL Cost Catalog and include a sample for your reference. Please, forgive me if I tend to take some short tangents along the road, but hopefully you will see how all of our efforts and constructs will The many companion public and published publications regarding the definition, interfaces combine to a solid Cost analysis for an IT service and can be directly input into our and process links to the complete ITIL Service Delivery agreement.

Discipline library and infrastructure through companies like or organizations of EXIN, OGC, It should be mentioned here that my startCCTA, itSMF and others, will not be described to-finish methodology is not just for ITIL based here, but references will be made and process management organizations.

The highlighted as they relate to our new underlying concepts, approaches can be methodology approach of Cost definition and augmented and modified to any Process Cost transfer to our supporting User Management set of disciplines, with some Information (IS) groups via the SLA (service minor adjustments.

Level Agreement) process.

Therefore, I have assumed the reader has a familiarity and Finally for any questions, comments, working knowledge of the ITIL process suggestions, inspirations, please Email me at: management arena, or at least understands [email protected] the importance of SLAs.

Finally, what I have tried to accomplish is to fill in a major piece to the ITIL Financial Management puzzle by directly correlating any IT Service (as a defined by a set of resources, technology, software and people-staffing) to what we now realistically see in the IT / IS arenas as industry best practice items.

This has always be the primarily problem with ITIL Financial (Cost) Management is the ability to implement a bubble-up approach of taking low level unit cost items and constructing a snapshot source financial cost analysis of: 1) Your Current IT Service costs and then… 2) Compute an equitable yearly User Unit Price value that can be directly used in our negotiations with users to bind the IT Service to the SLA for service delivery.

In order to accomplish this, we will walk through the sequence of building service catalogs, developing the input we need to Copyright © The Art of Service.

Page: 2 Kenneth J DeOre ITIL, CPCP, BP/TCO Thank You! Table of Contents 1 – ITIL® COSTING & FINANCIAL MANAGEMENT INTRODUCTION ………………………………………………………… 5 BACKGROUND ……………………………………………………………. 5 ITIL Financial Management Services ………………………… 5 Comparison: Old to New Thinking……………………………. 6 The Basic Concepts of Costs ……………………………………. 6 The New ITIL Financial Management Position…………… 7 Our Road Map Ahead ……………………………………………… 8 2 – ITIL COSTING BASICS (TOP DOWN) ……………………. 9 BACKGROUND ……………………………………………………………. 9 RELATIONSHIPS …………………………………………………………. 9 THE SERVICE CATALOG ……………………………………………… 9 Service Catalog Sections………………………………………….. 9 Critical Sections and Areas ………………………………………. 9 Service Administration ………………………………………….. 10 Operational Support Areas……………………………………… 10 Who Creates the Service Catalog? …………………………… 10 THE COSTING CATALOG …………………………………………… 10 Background ………………………………………………………….. 10 Cost Catalog Sections ……………………………………………. 11 Critical Sections ……………………………………………………. 12 Service Introduction………………………………………………. 12 Cost Summary and Detail Tables…………………………….. 12 User Unit Pricing Sub-section…………………………………. 12 Costing Allocation Matrix ……………………………………… 12 LOCATION OF THE CATALOGS …………………………………… 13 Usage of the Catalogs ……………………………………………. 13 SERVICE TO COST CATALOG ALIGNMENT ………………….. 13 Cost Catalog Operational CIs………………………………….. 13 ITIL Disciplines to our CI Values……………………………. 14 Important Considerations……………………………………….. 14 Summary ……………………………………………………………… 15 INPUT TO DEVELOPMENT OF ITIL COSTING CATALOG .. 16 3 – ITIL COSTING SEQUENCE …………………………………. 18 BACKGROUND ………………………………………………………….. 18 METHODS OF CAPTURING COSTS ………………………………. 18 Dynamic (or Real-Time) ………………………………………… 18 Sporadic (or Near-Time) ………………………………………… 18 Period Snapshot ……………………………………………………. 18 COST TRACKING & SERVICE MAPPING ………………………. 19 How much –vs- When……………………………………………. 19 Business to IT Service Mapping ……………………………… 19 TCO –vs- Productivity Grid……………………………………. 20 Raise TCO and Raise Productivity – An Example ……… 21 COST TYPES (CATEGORIES) IN USAGE ……………………….. 21 Regular / Fixed……………………………………………………… 21 Flexible or Load Demand Driven ……………………………. 21 Periodic – Technology Refresh……………………………….. 22 Copyright © The Art of Service.

Page: 3 Our Common Cost Areas (to be used) ………………………22 CCA Detail and for CIs…………………………………………..22 Users and Their Impact …………………………………………..22 USERS OF OUR SERVICES ……………………………………………23 Will They Be More Productive? ……………………………….23 Importance and Usage …………………………………………….23 Example of Defining Users ……………………………………..24 Compounding Affect of Users …………………………………24 Recommendation……………………………………………………25 COST ALLOCATION MATRIX ………………………………………26 Identify the IT Services …………………………………………..26 Understand the Service Relationships ……………………….26 Spotting Sub-Services …………………………………………….26 Costs Associated to ITIL Areas………………………………..27 SETTING UP THE ALLOCATION MATRIX………………………27 Cost Allocation Structure ………………………………………..27 The ITIL Percentage of Costs ………………………………….27 Comments About Training………………………………………28 Hardware and Hardware Refresh ……………………………..28 Technology Costs are Unique ………………………………….28 Monitoring of Old and New IT Services ……………………28 How Often Should it be Reviewed……………………………29 Executive Level Input and Involvement…………………….29 OUTSOURCING PART OF YOUR COSTS …………………………30 Impact on Cost Allocation Matrix…………………………….30 Agreements with Outside Providers………………………….30 Typical Outsourcing Cost Sequence …………………………30 Who Has The Accountability in Outsourcing?…………..31 Summary – Outsourcing Costs …………………………………31 DEVELOPING THE COST CATALOG SECTIONS ………………32 Requirements: A Costing Tool…………………………………32 A Word About Types of TCO Tools…………………………32 Using the Cost Allocation Matrix……………………………..33 Your at Completion (… Almost)………………………………33 Top to Bottom Approach to Costing …………………………33 AMORTIZATION FOR IT COSTS – A REALISTIC APPROACH ………………………………………………………………………………..34 Cost Assumption Tables………………………………………….34 Events That Will Increase Costs ……………………………34 Events That Will Decrease Costs …………………………..36 Application of Cost Matrix versus Cost Increases / Decreases Values……………………………………………………37 Summary of Increasing / Decreasing Costs………………..38 RECOMMENDED FIRST ANALYSIS APPROACH ………………39 Building your Cost Catalog Sections ………………………..39 Some Output Examples of Cost Tables……………………..39 Costing Catalog Documentation ………………………………41 Costing Catalog Documentation ………………………………42 Cost – Sanity Checking …………………………………………..42 Combining Costs in the Cost Catalog ……………………….42 User Unit Pricing……………………………………………………42 Final Thoughts on SLA Pricing Inputs………………………42 ITIL Cost Catalog Example …………………………………….43 4 – USER PRICING METHODS …………………………………..44 SOME CONCEPTS OF USAGE ………………………………………. 44 Necessary Requirements ………………………………………… 44 Methods of Calculation or Using the Yearly User Pricing Value…………………………………………………………………… 44 1 –Yearly User Pricing Method: ……………………………… 44 2 -High Resource Utilization Method: ……………………… 44 3 – Chargeback Specific Method:…………………………….. 45 4 – Level of Maturity Method: ………………………………… 45 5 – Server Based Method:……………………………………….. 45 6 – WEB and/or e-Commerce Hosting: …………………….. 45 Summary ……………………………………………………………… 45 CALCULATING A YEARLY UNIT USER PRICE ………………. 47 ITIL Major Areas are Encompassed ………………………… 47 Calculating the Yearly Unit Cost Value……………………. 47 Annual Charge-Back Value ……………………………………. 48 Balanced Charge-back to User Charge …………………….. 48 NEW USERS AND THEIR IMPACT ………………………………… 49 Differences of Real time Technology ………………………. 49 Downtime and Availability …………………………………….. 49 Who Provides the Number(s)………………………………….. 50 How New Users Will Affect Costs ………………………….. 50 New User Populations – Implementation………………….. 51 Reasonable & Realistic Population………………………….. 51 Other Implementation Population Types ………………….. 51 Note on Extending the Enterprise ……………………………. 52 Cost Catalog Time Estimates ………………………………….. 52 5 – HANDLING NON-ORDINARY COSTS…………………… 53 COST CATALOG SUB-SERVICES ………………………………….. 53 Structure of Sub-Services in Costing Catalog……………. 53 Straight-Line Percentage Approach …………………………. 53 Weighted Percentage Approach………………………………. 53 Justifying your Approach……………………………………….. 54 Per-User Service Pricing………………………………………… 54 Calculating Sub-Service Pricing ……………………………… 55 6 – SUMMARY……………………………………………………………. 56 IDENTIFICATION ………………………………………………………. 56 ALLOCATION OF COSTS…………………………………………….. 56 AGREEMENT AND JUSTIFICATION ………………………………. 56 SANITY CHECKING …………………………………………………… 56 UNIT PER USER PRICING …………………………………………… 56 COSTS –VS- ROI TYPE METRICS ……………………………….. 56 Usage of ROI ……………………………………………………….. 57 Usage of NPV ………………………………………………………. 57 Usage of IRR………………………………………………………… 57 REVIEW AND ADJUST………………………………………………… 58 APPENDIX – A…………………………………………………………… 59 SERVICE CATALOG AREAS ALIGNED TO COST CATALOG AREAS & ITIL DISCIPLINES………………………………………. 59 APPENDIX-B: ……………………………………………………………. 61 Copyright © The Art of Service.

Page: 4 SAMPLE COST CATALOG ……………………………………………61 1 – ITIL® Costing & Financial Management Introduction business unit which is not only customer-led but also accountable and forward looking. 1” All businesses must perform some form of costing – IE determining the true cost of providing the IT services. ITIL Financial Management Services Charging, the recovery of costs from users on an equitable basis is a business decision.

Charging for IT services can prove to be an emotive issue and difficult to implement in a fashion acceptable to all parties.

However you can eliminate the emotion of determining the important costs by doing an objective and fair assessment of chargeback costs.

With this in mind, I always remember the quote: Background Welcome to the restructured approach of defining the new ITIL Financial Management discipline, its methodology and its usage in actual IT / IS organizations. (Remember the term IS – its stands for Information Systems, or the actual users of services that are deployed over time by your IT department.) Yes, we’ve heard a lot about the general “IT to Business Alignment (IS)” paradigm shift and its affect on the entire IT canvas.

But this paper is not specifically about this global area. — Page: 14 for at least the initial year, called your base year.

You can therefore spread (amortize) these costs across the period of your choice, either 3, 4 or 5 years. (3-years is recommended.) In order to amortize these values, we will need to know some basic facts: 1.

Are there any major factors in our IT service that may influence how costs are incurred and when? 2.

If so, then what’s the percentage of increase or decrease anticipated in each major category based on these influencing factors.

For example, we can anticipate that our Help Desk costs will increase (due to adding staff and equipment) if the number of users we are supporting increases in future years due to call-in volume.

So, the number of supported (application or outside) users is a major factor.

But our Monitoring category costs may (or could) remain constant or even decrease over the same time period.

A Single ITIL Costing Area Single CI Metric “Provide Physical and Logical Security Protection “ •Has a cost value •Can be measured •Part of an ITIL Discipline Third, you may add additional CIs to this list in any CCA category, but make sure you are not duplicating or re-stating costs.

In addition, you can add any new CCA (common cost area) into your list, as long as it has significance and their costs are not repeated.

Finally, I would highly suggest you include this table as an appendix into the Cost Catalog.

In this way, your reading audience can immediately see the relationships between your CCAs, used in your Cost Summary, to their underlying metric values (defined by the CIs).

I have included such a table in this paper as Appendix-A.

The following diagram shows this relationship: Summary Ok, let’ summarize what we have thus far. 1.

The Service and Cost Catalogs should fully describe the IT Service, its components, its purpose and its deployment costs. 2.

The Costing Catalog binds to the Service Catalog through the CCA areas, which in turn have underlying costs metrics.

Additional CCAs may be part of the Cost Catalog, if Cost necessary and their additional Catalog Common cost are not duplicated.

Categories 3.

Determine any percentage adjustments to your major cost categories (Help Desk, Monitoring, Engineering, etc). 4.

The Costs Catalog contains the: Summary, Cost Detail and finally the User Unit Pricing information necessary for charge-back purposes. 5.

The Cost Catalog is not an ROI or benefit analysis. 6.

The Cost Catalog is a point of time snapshot of costs agreed upon by senior IT and IS management. 7.

To show all of the above relationships thus far, the following diagram (Input to Development of ITIL Costing Catalog) is provided.

We will continue to update this diagram as we develop the other major areas of the ITIL Cost Catalog. Final Cost Categories Attributes Provide Physical Security Provide Logical Security Provide Network & Server Monitoring Perform Availability Reporting Perform Capacity Management Ensure Systems Availability Others… Help HelpDesk Desk Monitoring Monitoring Engineering Engineering Technology Technology (New )) (New Technology Technology (Refresh )) (Refresh Software Software Training Training Monitoring Service to Cost Catalog Common Categories These are your major cost areas that will be used in your final Cost Summary Table. — ITIL Costing Catalog Cost & Pricing Serv Intro Cost Summary CCAs Cost Detail Tables User Unit Pricing Cost Alloc Matrix Appendix Info Final SLA Pricing Components Help HelpDesk Desk Monitoring Monitoring Engineering Engineering Technology Technology (New )) (New Technology Technology (Refresh )) (Refresh Software Software Training Training Common ITIL Cost Areas Copyright © The Art of Service Page: 16 Common ITIL Costing Areas Help HelpDesk Desk Monitoring Monitoring Engineering Engineering Technology Technology (New )) (New Technology Technology (Refresh )) (Refresh Software Software Training Training Install & Customize Software Install and Configure Hardware Develop Measurements Techniques Provide Capacity Planning Provide D / R Prepare Service Catalogues Engineer Disaster Recovery Systems Test D/R Systems Identifying CIs Test Changes Help Desk Provide Break/Fix Services Track and Resolve all IT Issues Perform Problem Analysis Identify & Resolve Problems Provide Physical Security Provide Logical Security Provide Network & Server Monitoring Perform Availability Reporting Perform Capacity Management Ensure Systems Availability Sample Subordinate ITIL CI Cost Values — Key Point If you have to make a (hopefully educated) choice on these values, then it’s best to go slightly on the high side.

Why? Because in your Costing model if you miscalculate on a lower number of yearly users, then you may end up spending more in your Technology Refresh area to take up the demand, if more users need to be supported.

Conversely, if you estimate high, and a lower amount is supported, you can save (at least on paper) any Technology upgrade costs. Note: Some additional comments are described in the sub-section New Users and their Impact in the section: 4-New User Pricing Methods.

If you are only are asked to financially develop a cost analysis for one IT service based on you’re an input Service Catalog, then you may skip the next Cost Allocation Matrix description.

However, you should be familiar with its concept if future IT services will be implemented and supported within your ITIL areas.

If this is the case, then be aware that additional IT Services will require an increased load on your Cost Allocation categories and force you to re-develop your table values Now, let’s start building our Cost Catalog.

We start by defining our IT services and their Common Cost Area (CCA) percentages.

This is called a Cost Allocation Matrix. Copyright © The Art of Service. Page: 25 Cost Allocation Matrix For example, Data Warehousing and Email are both considered IT services, because they At this point we are ready to develop a Cost play a part in your organization’s IT support Allocation Matrix or table.

The purpose of this charter.

SAN can also be considered an IT matrix is to identify and verify how ITIL Cost service and indeed both Email and your Data areas should be spread across either a single Warehousing services would make use of your or multiple IT services and placed into our Cost SAN fabric for their disk storage needs.

Catalog.

The steps involved are shown below Therefore one could safely point to your SAN along with a sample table: service as a crucial business impact service if disabled even for a short Remote Data Branch period of time.

LAN Email Warehouse SAN Office NAS These type of Service Service Service Service Service discoveries ITIL Totals are usually by ITIL the output Costing Area result of a Areas 30% 30% 10% 5% Help Desk 25% 100% D/R business impact 10% 10% 10% 60% Monitoring 10% 100% analysis 20% 20% 10% 20% Engineering 30% 100% assessment (BIA). 10% 60% 5% 5% 20% Training 100% Therefore Yes Yes Yes Yes Hardware Yes there is a unique set of Hardware relationships Yes No No Yes Yes Refresh to our combined set Cost Allocation Matrix of IT services in our Matrix table. Identify the IT Services Identify what IT Services will be part of a implementation or rollout program.

They do not have to be new services, but may already exist and are now being made available to your User community (sometimes call LOBs – Line of Business) or finally officially documented for your IT department.

It is helpful at this point to be global in identification of your IT Services. Understand the Service Relationships Interrelationships within services will occur.

You will find that one service may rely or directly depend upon another service or multiple services.

For example, it would be hard to rollout an Email service for a department if your LAN service is not deployed and available.

But from a costing viewpoint, you have to decide what portion of a common service is used by other services.

This is because you only want to state the cost once and not duplicate it in again in another service.

It’s ok to have a break-down or percentage of costs, which is where the Matrix is used “ The more one knows, the more one simplifies.” – Elbert Hubbard Don’t get bogged-down in technical detail of each service.

Granularity is not important at this stage.

Copyright © The Art of Service.

Page: 26 Spotting Sub-Services Within a defined IT service, you may find what is called sub-services.

These are defined in both your Service and your Cost Catalogs.

For example, maybe operationally in your SAN service you also provide the capability of Backup & Recovery of disk data.

Ideally, this would be a logical extension to your overall SAN capability.

In this way, users (obtaining storage from your SAN pool) would not have the burden of doing their own backups.

That functionality would be provided inside of your SAN and is called a sub-service.

Costing for sub-services is common and is discussed fully in the section Handling of Non- Ordinary Costs. The ITIL Percentage of Costs After we get agreement on the ITIL Cost areas and how they should be allocated, we can populate our table with the percentage values.

Note: Each ITIL Costing Area percentages must add up to 100% across your services.

This is probably where you are going to spend 50% of your time, is in getting the percentages close to what is expected.

Also, having historical or previous time spent charts would be a good starting point.

Make sure you have agreement from your IT executive staff on these percentages before proceeding!! The Matrix itself is for your reference and usage when you start cataloging the specific costs.

In the examples we are using: • • • • Help Desk Monitoring Engineering Training Costs Associated to ITIL Areas The last part of the Allocation Matrix is assigning a percentage value to ITIL functional cost area across all of your services.

If you only have one defined service, then each ITIL area would be allocated 100%.

If you had two IT Services A and B, for example, then you need to decide what percentage allocation seems feasible before you start listing the costs.

You want to avoid the mistake of having both services A and B use 100% of your Help Desk ITIL area.

If it won’t work in real life, it won’t work in Service Costing. Setting Up the Allocation Matrix As an example, I have included a Cost Allocation Matrix on the previous page.

Inside the table I have listed my IT Services on the top row and listed my ITIL Cost Areas on the left side.

Since we have already defined the components or configuration items (CIs) inside of the ITIL Cost Areas, we know what is included. Cost Allocation Structure In my example, I have five IT Services listed.

Some may already be implemented (deployed) and others may be in the early stages of rollout.

Note here, that as I create/define new IT services, I will need to go back and update my Matrix table.

Also in my table I have the additional two areas called: Hardware and Hardware Refresh.

I will explain these later.

I have already defined the Software components inside of the Engineering area. (I could have a separate lineitem called: Software in my Matrix table). This is the minimum or basic set..

You can add others, if necessary.

Each one of these areas is called a Common Cost Area (CCA).

In our example, if our total cost for supporting and delivering a Help Desk function is $10 million dollars (which includes salaries, labor and materials), then we would expect to spend $6 million dollars (or 60%) to utilize my Help Desk to support my LAN and Remote Email services combined.

This could be very reasonable since I may have 300 or more people in my Help Desk area needed to support my user population for those services.

Notice also that I am only allocating 5% of my Help Desk costs to my SAN service.

Again, this could be reasonable since the number of incident calls (from my users) handled directly by the Help Desk specifically for SAN problems is likely to be minimal.

My backend users probably don’t realize they are using storage from a SAN fabric.

Therefore any problems Copyright © The Art of Service. Page: 27 with my SAN would be noticed and handled first by my Monitoring and Engineering groups. Comments About Training Notice that each ITIL category has some Training value assigned.

We view Training to include both the IT Service deployment and the end-user (LOB) groups, as the delivery cost incurred by outside vendors.

However, the cost of Training should diminish over time as experienced users can internally fulfill that requirement. (as in-house trainers).

If this is not the case, then you should maintain the training cost across your analysis period. best practice, you should provide an anticipated cost.

I will give you more information on how much to allow for this cost area in the next section.

In my example Matrix table, I just make a Yes/No determination as to whether this cost would apply to any of my IT services.

For example, my Data Warehouse service is less likely to require any technology upgrade within my cost analysis period (2-years). Technology Costs are Unique Note: If your notation is Yes to either Technology and/or Technology Refresh then you must supply the specific CI values and costs (Servers, Switches, Storage, etc) that are unique to the specific service.

A good example of this is the following scenario: If your IT Service is a Data Warehouse or an operational Data Mart capability and its storage resources are obtained from your SAN service, you can’t include any of the SAN technology equipment since they have been stated previously in your SAN service.

The same exact rule applies for the Technology Refresh.

Key Point Maintenance Costs – The Big Factor Of all the items listed above in your Technology Refresh costs, the most significant (as a trend in Service Delivery) will be your hardware / software maintenance costs.

They will increase.

As more vendors are being squeezed to lower technology costs, their maintenance costs will increase to make up the shortfall in their margins.

These could be situations where for upgraded hardware, the first year’s maintenance is pushed out until the second and third year, so as to appear that’s its free.

Its not free; Its just deferred. Hardware and Hardware Refresh These two areas should be part of your ITIL Cost project.

The Hardware area is where you capture and define the following costs: • Hardware components (Servers, Routers, Switches, HUBs) • Desktop PCs • Workstations • Hardware Maintenance • Software Maintenance • Hardware Vendor Support • High Speed Lines • Any other Hardware cost not already covered in another area.

The Hardware Refresh area is provided to capture costs associated with upgrading or replacing some of your Hardware infrastructure every two years.

In general, the cost of technology is decreasing while its value is increasing. (For example now we have close to 10Gbit/s Fibre, increase from 4 – in less then two years for SAN services).

Therefore, as a IT Copyright © The Art of Service.

Page: 28 Monitoring of Old and New IT Services If you develop and plan to deploy a new IT Services, then you should go back to your previous Matrix table and do the following: • Add the New services (Names) • • Re-adjust the Costing Area percentages Distribute, review with your CxO levels and Executive IT Management and get complete buy-in-approval. “Unlike wine, bad news doesn’t get better with age.” – Author unknown.

So its best to spot any abnormalities early before your too far down in the swap.

Finally, the question comes up: “ Do I need to completely re-do the Unit Pricing value for existing services if I deploy new or additional services?” The answer is theoretically – Yes.

However in real life if you adjust your values every two 1 to 2 years, that should be financially valid for cost allocations. How Often Should it be Reviewed It depends.

But since IT costs are generally dynamic and fluid in nature, I would suggest a review of the Matrix table at least every two years, but realistically every six-months can be acceptable.

Realizing that in your review some of the costs and percentages may change, you are faced with the task of collecting the new information and determine its validity.

I have seen companies that are at the leading edge of this area, implement online noninvasive monitoring software agents to collect and store this meta data.

The meta data and observations are then calculated and reported against existing cost usage within each ITIL category.

This will reduce your effort by approximately 60%, but you will still have to: • Track and obtain how close your Costing percentage are to actual time spent.

This should be on a quarterly basis.

Check with each ITIL group represented for any increase costs (staff, equipment, software, hardware, etc).

Always update the Allocation Matrix if necessary with new services.

If a particular defined service is taking longer to deploy or having higher than average problems, then I would go back and re-create its Costing Catalog to discover any new or drastic shifts in costs.

There are a lot of red-flags that you can spot along the way like: Longer time to implementation, excessive cost exceeding expectations, constant high Help Desk problems and Management’s attitude / feedback towards this service. Executive Level Input and Involvement — If you engage in outsourcing for some or all of your service support or delivery, then your logical steps become: • Identify the Common Cost Areas (CCA) item to be out-sourced.

These may be different than the ones we introduced earlier. • Negotiate and contract with a coprovider to support these parts of your IT service. • Update your Cost Allocation Matrix to reflect these costs (EG your costs to the co-provider). • Continue to develop your Costing Catalog and compute your User Pricing Value for SLA with your User Groups. Note, since this is currently a volatile issue in today’s global economy for both employer, employee and indeed countries, to maintain some sense of objectivity, I am not taking issue with any of the positives or negatives, but just stating the tread in industries is expanding, especially in IT, as we see it today.

This doesn’t mean that we should become totally blind to these third-party costs, because in reality your IT (or company) organization is still paying for this service, but possibly at a cheaper rate or at a steep discount and/or savings in equipment Copyright © The Art of Service.

Page: 30 Key Points First, your ability to negotiate and contract with outside providers for support of your IT services should appear to be seamless and transparent to your IS User Groups.

Second, you are still obligated and required to allocate, catalog and state those outside costs in your final Cost Catalog for this IT service.

Third, whatever the outsourcing costs are you should factor these into your final User Unit Pricing calculation to develop your final pricing value. remember that contractually, an outsourcer is usually responsible for assessed penalties if either Performance or Availability targets are not achieved in your SLAs.

These are usually credits assigned to our company by the outsourcer and accounted for on a quarterly basis.

However, for our purposes, these penalties should not be considered part of our Cost Catalog nor should they be part of any Yearly Unit User cost value. Summary – Outsourcing Costs Our model and methodology of ITIL Cost Cataloging does not change.

We are now documenting and analyzing costs, burden by the outsourcer, and billed to our company (plus a mark-up profit).

Someone still has to account for the costs and that’s our responsibility, using our methods.

Finally, depending how our company treats outsourcing costs they may elect to pass-thru the entire cost (over time) to their groups via SLAs or distribute the costs evenly across all groups whether or not they utilize our IT services. Who Has The Accountability in Outsourcing? Because outsourcing in itself interjects another layer of costs for support, our attention needs to be focused on the following: 1.

Service Accountability – The service provider (the outsourcer) has the responsibility for service delivery and the burden of those costs.

The IT organization in our company may not exist or may just provide operational support.. 2.

Cost Accountability – It still important especially now since your Capacity and Availability Management groups must be tightly in concert with your outsource provider.

Costs for service delivery should still be catalogued using our methodology discussed in this White Paper. 3.

SLA Pricing Accountability – Since we are still developing our Cost Catalog, we still need to establish a Yearly Unit User Price value (this is explained fully in a future sub-section).

This value is what is passed onto our IS groups for chargeback from IT regardless of whether service is provided in-house or in this case, outsourced.

Also Copyright © The Art of Service.

Page: 31 Developing the Cost Catalog Sections Now we are ready to add some meat into our Costing Catalog.

As I mentioned previously, each IT Service should have its own Costing Catalog and it should compliment its previously created Service Catalog.

Here is what you will need: Requirements: A Costing Tool A PC based Cost tool or program.

There are plenty of them out in the marketplace, but make sure it provides you with the capability to spread your costs over at least 3-years and can provide a granular Cost Summary table and drill-down detail. in a comparison analysis, don’t to too surprised if the vendor’s suggested configuration and equipment magically appears to be the better (or lower) TCO choice.

In addition, for most, their attempt at ROI is deplorable at best.

The Buyers type TCO is designed for any organization anticipating either an upgrade or a completely new development of IT service.

They are objective, allow multiple comparisons, scenarios of costs and include detail low level line items.

In addition their ROI portion is more robust and addresses the anticipated increase in productivity in real metric terms.

Finally, several user shareware XL files are also available, but without support or updates.

Many of these are web based. (But remember, you get what you pay for.) For the purposes of this paper (any the subsequent examples used), we would recommend a general purpose Buyers TCO (and ROI) tool.

To be completely objective, I will not make any recommendation on any, but leave that for your own research. (If you are curious, you can do an Internet search on “TCO Tools” to find references.) Key Point Cost of TCO Tools For Seller TCO tools, they are usually the sole property of the vendor and only available through a vendor’s pre-sales organization.

For Buyers TCO tools, they can be directly purchased via the internet, but fall into the range of moderate to high in costs.

Finally, even though these tools are readily available, the key is in using them so the costs are completely segregated.

Remember even the best Tool can still get you in trouble if you can’t explain where the costs came from or how they are being spread across your analysis period. A Word About Types of TCO Tools A word of caution is required here.

In general you will discover two types of TCO “modeling” tools: One for Buyers and one for Sellers.

Be careful of this minefield in determining which type of tool to use.

These are: The Seller type TCO if often made available via hardware/software vendors and attempt to be objective.

But in using these type of tools, Copyright © The Art of Service.

Page: 32 Using the Cost Allocation Matrix Make each service a separate Cost analysis project.

Using the Cost Allocation Matrix and an itemized list of your costs, input your detailed information for each CI into your Costing tool.

For example, Help Desk, may have 18 individual CI’s that have cost values.

When you complete a ITIL Cost area, then: Make sure you take only the percentage of your total cost based upon your Cost Allocation value.

Input only that percentage, but make note of the total cost value for later documentation purposes.

You know that at some later date or staff review of your document, someone will challenge your reason.

Example: Using our sample Matrix, if you are working on the SAN Service using the Help Desk costs – then you should only take 5% of the total value.

Obviously, this 5% value was obtained from previously from your Help Desk management interview. Cost Summary Help Desk Monitoring Engineering Training Technology Optional SubServices Technology Refresh Software Your at Completion (… Almost) When you completed all the ITIL Cost Areas, then run your report and produce the Cost Summary table and the individual Cost Detail tables.

See Block Diagram below a top-down view: However, you may need to go back and modify your cost percentages, based on either current or envisioned (possible) circumstances.

See the next section for specific detail: Amortization for IT Costs – Realistic. Top to Bottom Approach to Costing Examine the block flow for the Cost Catalog Sequence of input sections.

Remember this is just a template.

You may include other major categories, as long as, their associated costs are not duplicated in any other area and are consistent with the ITIL areas we have defined. Copyright © The Art of Service. Page: 33 Amortization for IT Costs – A Realistic Approach All of the ITIL categories shown above, plus any new categories you include, will be amortized across the period you specify in your TCO tool of usage (unless you specify just one year).

This means that given your payback period and percentage, the principal payment values will increase but the percentage payment values will decrease over the period you indicate, by default.

If we use three years, then both the primary payments and percentage payments will be become zero at the end of three years due to the sliding amortization scale, ergo – your loan is paid in full.

However, we have seen examples previously where a yearly expected value might increase or remain constant instead of showing a decrease.

How does one know which category will impacted and what percentage should be expected? OK – first, we are dealing with “What Ifs”, which oftentimes become “It’s Happening Now” in real life circumstances.

IT expenses are not in the same category as automobile or mortgage loans.

Second, remember we are not paying for a simple car or real-estate mortgage loan, but a continuous ongoing cost of service sustainability in Service Management as long as we have a single LOB user group requiring our support for Service Delivery and Management.

Key Point Remember that our ITIL measured IT Service Cost method is really a snapshot in time of our total costs (TCO) for a span of x number years for an ongoing service.

Therefore because of reasons discussed before, our percentage of costs will be variable, but predicable within the following Cost Assumption Tables. Cost Assumption Tables The following two tables are provided to enable us to spot which events and area categories will be impacted, by a cost increase or decrease, based upon a given event.

It by no means attempts to define all of the events, but provides a reasonable set of guidelines (or Best Practice values) of how to adjust your yearly cost percentage values based on our amortization schedule. Events That Will Increase Costs — Model Improve your ITIL Process Management Areas Staff Reductions Copyright © The Art of Service. Page: 38 Recommended First Analysis Approach Now run (execute) your TCO cost model using the application of support percentages mentioned above.

Review your output yourself (what I call: sanity checking), then review with your IT Sr.

Staff up to your CIO.

At this point you need to query whether there are any expected or anticipated events that would cause a predicable percentage change, based on the areas described above.

If so, rerun your model analysis using the acceptable value (either up or down) for those years indicated.

Then re-do your cost analysis calculation and schedule your final review. Costing Approach.

The diagrams, on the next pages shows a combination of this information, including a portion of the detail Costing Tables.

Notice that in our example tables, we included Software and Technology Refresh as top level costs.

The Software cost had to be included since it was new and not part of any other major ITIL Cost Area.

Key Point (Note: This is where the importance of the Service Catalog comes into play.

The Service Catalog is our reference to whether we have software or hardware costs encapsulated in one of the other CCA’s or as a separate cost area.

This is why the Service and Cost Catalogs are bonded together.

In addition, the Service Catalog will document any sub-services for this major IT service.

This is important and is discussed in the next sections.) Note, the Service Catalog, normally does not have lower level Configuration Items, which we use in this paper as Cost Items, but only major CCA (Cost Category Areas) – Help Desk, Monitoring, Engineering… etc, as examples. Building your Cost Catalog Sections Finally, document your input values, recommendations and suggestions from your IT and CIO / CFO staff as part of your Cost Catalog document – and build your first report output metric report. Some Output Examples of Cost Tables Your Cost Summary area should contain all of your Common Cost Areas (ITIL Areas) spread across your analysis period (EG three years).

Your Cost Detail tables contain the itemized costs for each CI in that specific Cost Area.

We commonly refer to this as our Top-to-Bottom Copyright © The Art of Service.

Page: 39 Cost Matrix Association Cost Summary Table Examples I have extracted some table diagrams from the example Cost Catalog included in Appendix-B for clarity.

These two tables, are linked together: The Matrix and Cost Summary tables are the starting points of our cost drilltop (top-down) approach.

The Cost Allocation Matrix table is our starting point of our analysis as to how we developed our assumptions made in our subsequent summary and costing detail tables.

Note in this example, we have assumed that the SAN IT service is the main focus for Service Delivery, since both the Email and Data Warehouse services do not require our immediate support – they may have their own collaborated LOB support teams.

But the point here is that we know this upfront and state it clearly. Cost Summary — Page: 41 Costing Catalog Documentation Although not really necessary, you may want to include a graphic pie-chart which represents the data in your Cost Summary page (see above).

This is fairly easy using the MS graphic object inside the MS XL product.

An example is shown below from the data previously display from the Cost Summary page: values.

If so, you need to explain that as well document what the total value was prior to any adjustment. You should also include, for documentation purposes, your current Cost Allocation Matrix so reviewers will know your percentage assumptions.

Make sure you include the entire table matrix.

I have provided a simple block diagram, representing your Costing Catalog along with the Cost Summary and Detail sections included.

Please see table above: User Unit Pricing The last major part to the Costing Catalog is discussed in the next section.

Its called User Pie Chart of Total Costs Pricing methods and is used to calculate and determine what value, and method, will be Note: In order to produce this chart and to be used to develop a charge-back and SLA with correct, you should total across each of the your user groups.

Viewpoint:: This makes ITIL Cost Areas for the three years so you can your view of costs the same as your user show the Total Costs in one graphic.

I also did groups that we will be supporting by your IT this so anyone would be able to immediately service(s).

See the costs by the ITIL cost areas. Cost – Sanity Checking Before you start building your Cost Catalog, this is the time to go back through the Cost Summary and Detail Tables to validate that your CCA metric input, assumptions and percentages have been accurately reflected in your output data.

If not, then investigate and correct any discrepancy.

Write this on the inside of your other hand with a ballpoint pen and remember it.

The first inside hand had to due with obtaining Management approval on your cost assumptions and assumptions.

Single Viewpoint Combining Costs in the Cost Catalog The costing output tables should be placed into the Costing Catalog along with a brief description for each.

For example, based on your Cost Allocation Matrix, you may have only taken a percentage of one of your total Cost Copyright © The Art of Service.

Page: 42 Final Thoughts on SLA Pricing Inputs Even though I have not discussed Service Level Agreements (SLAs) in any detail, they are obviously one of the completion points we need to consider with your User Groups.

Remember the statement I made earlier: “ Charging, the recovery of costs from users on an equitable basis is a business decision. ” I’ll add one more emphasis – it’s an industry Best Practice.

Therefore your User Groups (or IS departments) should expect to pay their respective share in charge-back costs.

This is where the Unit Pricing charge value is extremely important in order for the SLA process to be successful. ITIL Cost Catalog Example In Appendix-B is a sample of a simple Cost Catalog document.

It contains all the sections and information we have discussed in this white paper including the cost allocation table and the yearly user unit price calculation. Copyright © The Art of Service. Page: 43 4 – User Pricing Methods Some Concepts of Usage The Unit User Pricing value, sometimes called the yearly user price value, is critical to the overall content of a Costing Catalog.

In general, it is a number or factor that can be used by both service delivery and service support groups to: • Define a charge-back amount and scheme for any given supported group or LOB (line of business) using the specific IT service.

Used to negotiate and develop Service Level Agreements (SLA) between IT and LOB, User Departments and/or Agencies.

In certain cases, multiple Unit User Pricing values may exist in a single ITIL Costing Catalog due to the existence of sub-services (see section: Handling Non-Ordinary Costs). may be subjective (or weighted) depending upon the method you implement for user charge-back programs.

We will now review the methods available and then actually calculate a User Per Charge value for a sample IT service. Methods of Calculation or Using the Yearly User Pricing Value You may elect to use any approach in calculating final SLA pricing for individual Agencies, or indeed a combination of these approaches, when applicable .

Some of the common best practice approaches are listed below and all assume that a single company is the supplier of the ITIL service delivery area: — Allows all agency users to contribute a fair share of their usage costs based on current Costs and annualized adjustments (this is explain in more detail later.

See Section: Calculating Yearly Unit User Price). • 2 -High Resource Utilization Method: Categorize your user groups into Active, Sporadic and Minimal usage for each IT Service, then prorate the total service cost by percentage of these three areas (EG Active = 60%, Sporadic = 30% and Minimal = 10%).

This is primarily designed for low to mid-level companies, where the determination of the Yearly Unit Price is not an issue, but more of a subjective separation of costs.

You determine the percentage (subjective) and assigned the initial per User Unit value.

Then, at the end of a short (one year) cycle recalculate your costs and re-categorize each LOB’s usage.

This assumes that some decision would be made initially for each user group until objective metric data becomes relevant after your current fiscal year.

A good example of this approach would be for a LOB entity that is currently consuming 60% of your SAN storage.

Should they be charged 60% of your total SAN operational cost value? The problem with this approach is that it tends to imply that some monitoring of data usage by file types can be consistently Before going into the various Unit User Pricing methods, three points should be made. Necessary Requirements First, you can’t develop a Unit Price value unless you first complete the ITIL Cost detail portion of the Cost Catalog.

This is because the totaling values for each major cost area needs to be complete and then finally used in the Unit User Pricing calculation.

Second, the incremental incoming user number, or population number of new users who will be using (benefiting from) the IT service needs to be developed and agreed upon since it will also be used in developing the Unit User Pricing calculation.

Third, allocating and determining IT costs (or TCO) usually utilizes a standard structured method.

However, the charge-back for those costs back to the users, in many situations Copyright © The Art of Service.

Page: 44 displayed and supported in your environment. (Warning – In using this method your heading into the Information Lifecycle Management area.) Help Desk and Engineering support for daily problems.

Costing and Charge-back for this implementation would involve only the above two areas, but are based on a per server charge.

Co-Located Servers: A User Group has purchased, installed and is running a Server based set of applications inside (Co-Located) a common IT managed site.

The User Group still owns the Server and associated application costs, but now needs Help Desk and Engineering support for daily problems.

The IT department can provide those services in addition to the environmental considerations (security, HVAC, space, rental, etc.).

Costing and Charge-back for this implementation would involve the server charge but the underlying costs would include the ITIL support areas including physical site protection costs. 3 – Chargeback Specific Method: Determine the pricing of each IT service based upon the specific user group’s capability to either: 1) – Derive savings from previous years expenditures (costs) – IE a user group can do more with fewer resources and has demonstrated a cost savings from the previous FY. 2) – Develop the ability of the user group to generate increased revenue and profit from a previous FY. 4 – Level of Maturity Method: Allows for an objective analysis as to how mature or self-reliant a user group is with respect to help or assistance calls (EG Help Desk) or whether a user group can resolve daily problems without burdening IT based support (ITIL service support area). 6 – WEB and/or e-Commerce Hosting: Probably the lowest level of support or cost granularity.

In this case the Unit Cost value is most likely on a Web page basis.

A User Group(s) require WEB page type development, some ongoing e-Commerce software/support, daily Help Desk and possibly other ITIL areas.

The IT department provides WEB and eCommerce support from existing servers and manages all Engineering, Monitoring (including backup and recovery) areas.

Providing Capacity Management would be the responsibility of the IT department. — New User Populations – Implementation Type Description Prototyping involves deploying your IT service to a limited number of users and systems, generally as a test before beginning a larger implementation.

Discrete IT services are normally deployed to users in the same department or functional area of the company.

Enterprise-wide deployments include nearly everyone in a company or large division.

Extending the enterprise incorporates outside parties such as customers and/or suppliers.

In this case costs may tend to be higher for systems Help Desk, Monitoring and Engineering. (See: Note below) Prototype Other Implementation Population Types The following table contains the name and summary of the commonly defined New User population groups and how they are deployed in your service IT implementation.

These may and could be a factor in your ITIL Cost project.

Remember these are just definitions.

You are the one who alone supplies the number of users and when (EG, in what FY period) they will be supported.

But the key point is that the number and period of their initial deployment or support is important, especially when you calculate the Yearly Unit Charge.

The following table (left side) is provided for reference to classify your implementation type with regard to your user population and its scope.

Again, for most of your ITIL IT Service costing efforts, the Enterprise-Wide is the recommended approach unless you elect otherwise, based our definitions show above. Discrete Enterprise Wide Extending the Enterprise Deployment Methods of Users A major factor in your ITIL Costing approach is how wide a scope are you planning for in your approach for New Users? For normal ITIL Costing projects, you should assume that it is Enterprise-Wide, namely any user (or employee) requiring the need and benefit of your IT service can be counted.

But let’s conduct a sanity check here. Copyright © The Art of Service. Page: 51 — Sub-Service User Charge Calculation cells, rows and columns into the Unit Pricing section, similar to the example shown above.

Notice that both totals are the same: $2,042,107.

Meaning briefly: Costs going out equals Charge-back values coming in.

It is not until FYi+1 that IT will recoup all of its initial IT costs.

Finally, remember, we are dealing with charge-back accounting and in most (if not all) companies the values end up being internal IT credits not revenue or profit in the true financial sense.

This is so the IT area can still be defined as a Cost Center.

However, properly defining service costing (TCO) and computing your UPC value will enhance IT’s level maturity and ownership to the various user groups or LOB (line of business) you will support and increase value for the IT to IS connection point I made earlier. Calculating Sub-Service Pricing So, for Sub-Service A, the value of $680.70 was derived by taking the sum of sub-totals, including Help Desk and Monitoring 50% values and dividing that value with the compounded sum of each years number of users.

The calculation for the $680.70 cell (Unit Price Cost) is as follows: Unit Price Cost = 2,042,107 / ( 1,000 + (1,000 + 1,000)) This calculation is exactly the same in our previous scenario.

However in this case, we must add our two CCAs percentage values into the calculation otherwise they would be unaccounted and the IT sub-service would be set at too low a value.

Finally, the Annual Charge-Back amount is also computed by using the UPC value in a compounded sum of each years incoming users.

This technique was used in Figure X example and gives the IT department (the Service Delivery side) a picture of their total internal charge-back value.

I strongly recommend that you do your XL calculations separately and then copy/paste the individual Copyright © The Art of Service.

Page: 55 6 – Summary Finally, please keep these points in mind in handling ITIL Cost Catalog issues. we are not delivering a simple status report but a cost report against a valuable and critical IT service and we (and the costing information) will be viewed under the microscope. Identification Identify if your Costing Catalogs for multiple Sub-Services.

Make a choice of either using the Sub-Service cost approach or segregating out the Sub-Services into separate Cost Catalogs, if feasible.

In either case, your must account for all of the costs going into the subservices. Allocation of Costs Remember to allocate your Common Cost Areas (CCAs) costs across each sub-service.

The entire cost usage of a CCA should add up to 100%, even if its spread across multiple Cost Catalogs.

If you only have one single Help Desk, you can’t utilize it 300% of the time.

Costs are always Under the microscope It will therefore come under some scrutiny and if any one component or number is found to be suspect, then the entire report is deemed to be incorrect.

Check the numbers first! Agreement and Justification Justification of your approach.

Make sure you get buy-in with your IT executive staff before going headlong into using the subservice method.

Sometimes in their mind their service is a single entity, even though multiple sub-services exist.

Therefore the IT staff is rolling out this service as a complete package.

Remember, it’s a sure bet your going to have to justify your values in your final presentation.

Therefore, its best to have identified sources and the data. — Costing Catalog Intro & Purpose How the Costing Data was Collected. Costing Summary Summary Table Cost Matrix Table Pie-Charts Costing Detail Sections Description Detail Table ….

Description Detail Table …..

Description Detail Table Catalog Format Finally if all goes well, a complete cost picture will be presented in your ITIL Cost catalog.

An example of final Costing Catalog’s functional areas is shown on this page and also a full Cost Catalog is provided in Appendix-B. Unit User Pricing Section User Yearly Price Sub-Services Description Calculation of Value Calculation for Service Appendices ITIL CCA Cross Reference Interview sources Input Data sheets Copyright © The Art of Service. Page: 58 Appendix – A Service Catalog Areas Aligned to Cost Catalog Areas & ITIL Disciplines The following is provided as cross-reference information for clarity and understanding.

Read more about ITIL Cost : When these are completed we will then construct our ITIL….:

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Accredited ITIL Foundation, Intermediate and Expert Certifications, Learn more about ITIL HERE:

ITIL and ITIL Cost : When these are completed we will then construct our ITIL….

ITIL - ITIL Cost : When these are completed we will then construct our ITIL….

ITIL and ITIL Cost : When these are completed we will then construct our ITIL….

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