Best Practices: Activity-Based Costing IT Cost Allocation Strategy

Cost allocation is an integral part of managing IT like a business. IT leaders must select the right strategy to allocate costs, based on their business needs. You can then gain visibility into the fully loaded cost and quality of IT services and communicate the value of IT to business leaders. You can also 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. We will highlight a different cost allocation strategy over the next two Fridays.

IT Cost Allocation Strategy: Activity Based Costing (ABC)

ABC provides the most accurate and fair analysis of all the IT Cost allocation methods we have presented in this series so far. This strategy tracks IT activity that actually happened, as captured in an authoritative system of record, and then uses those numbers to distribute shared costs. For example, storage costs get allocated to storage consumers based on the dedicated disk space actually allocated to those consumers.

ABC here refers to data captured from a separate system of record. The system of record is the final word on what actually occurred. Moreover, if the system is a robust application or database of some kind, then over time it might potentially feed the cost model supporting the Technology Business Management (running IT like a business) initiative, in a fully automated fashion.

ABC is most popular where the usage data exists in a readily consumable format. Help desks, PPM solutions, and asset management systems are all good sources of activity data. The powerful benefit of ABC is that it enables IT to root out inefficient practices and cost reduction opportunities.

Would this allocation strategy fit your company?

A company should favor the ABC strategy if it is concerned with fairness, interested in improvement and change, and able to collect usage data. ABC works for companies focused on accuracy because each business division can be assured that costs are being divided fairly, and not by mere estimation or guessing. It’s hard to ask a business unit to pay for an IT service if costs are just divided evenly, but if it’s obvious that they are being charged on their own use, it’s easier for them to accept and support.

Inevitably, collecting the usage data is the biggest challenge to implementing this strategy. It can be challenging to figure out where and how to get the data, and how to maintain and automate its upload into the financial model.

We expand further on this strategy – learn more by downloading the entire best practices guide here. The Apptio Cost Transparency Foundation helps you demystify spending, so you can strategize on future investments.

Would this methodology benefit your business? Tell us in the comments below. We’ll be back detailing the next cost allocation strategy next Friday.