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Keys for Managing the “Q”: Creating IT Cost Transparency and Reducing Demand for IT Services

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by Ray Shehata

Enterprises have traditionally focused on reducing the price of IT services (“P”) through popular efforts such as squeezing provider rates or changing the delivery model to a managed service outsourcing arrangement. Meanwhile, the quantity of services consumed (“Q”) has received little attention.

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That is changing as companies increasingly see reducing “Q” as an effective way to achieve cost objectives. By driving cost transparency and showing end users how their consumption of IT impacts costs, executives can change end-user behavior to accept industry standard services. Put simply, putting a price tag on IT makes users more willing to opt for a different level or type of service if that means reduced costs.

Here are the ISG Top 5 key steps to developing a robust IT Services Consumption Management program.

1. Create a service catalog based on industry standards. First decide how you want to organize your services in the catalog and what you want to offer. A service catalog is never the end solution in itself; rather, it is intended to be an artifact created as a result of the IT service Portfolio Management process. A robust Portfolio Management process is required to engage with the business to understand their requirements and ensure IT services are designed, built, and delivered to meet those requirements. Once the business need is understood, look to the marketplace for leading and emerging service design considerations. One area to explore is how services are delivered in a managed service outsourcing arrangement. As ISG has observed, the market is becoming increasingly focused on service standardization. Rather than having 100 flavors of X resource units, an enterprise can move to five flavors that are industry best practices and reduce costs by as much as 40 percent.

2. Measure the cost of providing the newly designed services. To understand how much to charge back to the business, baseline the newly designed service delivery cost. Take this opportunity to also compare your costs to industry peers and market standards to identify opportunities for improvement.

3. Determine chargeback rates and use industry standard service levels. In most cases, service delivery costs define the chargeback rate published in the service catalog. In other cases, constructs are implemented to incentivize behavior among IT and business leaders. For instance, chargeback rates can be based on actual costs if the costs are at or below market rates, and market rates can be used when costs are higher. This “skin in the game” burden on the IT service team shows the business that IT is a willing partner in achieving the needed change in business behavior. If IT asks the business to eliminate unnecessary consumption of IT services (the “Q”), IT should return the favor and provide the service at the lower market price points, helping to quickly close gaps in efficiency and effectiveness.

4. Deploy the new service catalog along with a robust Consumption Management process. Create a business and service management view of the catalog, and push it out utilizing available Service Management tools. Because a direct correlation exists between IT asset management and a company’s bottom line, tracking consumption accurately and quickly is essential. A chargeback model requires tracking consumption by volume and level of service. Armed with the necessary detailed asset, billing and invoice information, procurement organizations can address overbuying and underutilization, finance can ensure over-payment is avoided and operations can measure operational compliance for services on the assets, all of which enables effective  recommendations for optimizing hardware, software and maintenance purchases.

5. Align the service catalog to the demand. Effective Portfolio Management should ensure the catalog reflects changes in technology and services. Work with the individual service owners and business unit representatives to develop planned changes to the service catalog to address documented service gaps, and add, modify or remove services by scheduling changes through the IT Change Management Process. To continually identify areas for improvement, track the actual usage and periodically (annually) obtain current market pricing for services. Understanding the service gaps and how your costs are changing compared to the market is important input to drive the appropriate consumption behavior.

ISG can help you build an IT Consumption Management program that reduces cost and improves transparency. Contact Ray Shehata to discuss further.

About the author

Ray helps Financial Services organizations with all aspects of their IT, back-office, middle-office and customer-facing service alternatives. He is an accomplished professional with more than 14 years of Financial Services experience and is skilled in developing and leading offshore and outsource strategy and assessments, and implementing IT and BPO service agreements for large, multi-national corporations. Ray has expertise in assessing which functions are optimal to outsource, offshore or re-engineer through shared services and determining the associated savings opportunity. In addition, he assists companies in evaluating, negotiating and implementing ITO and BPO transactions and designing appropriate governance organizations to manage the ongoing operations. Most recently, Ray assisted a Financial Services firm restructuring its infrastructure managed service contract, which resulted in more than 10 percent cost savings. In addition, the company significantly enhanced its contract terms and created a pricing structure that allows for cost transparency and variability as its business changes.