Beyond Beans, the Anatomy of Enlightened IT Costing: The Sixth & Seventh Partitions, the Clothes and the Annual Health Check

Written by David Crouch

Dear Reader, 

This mountain we have traversed together is such that “climbing it is hardest at the start; but as we climb higher, the slope grows less unkind.” This is especially true if you read the very long history of cost accounting in our last installment. Wise folk profess “foolish is he who hopes our intellect can reach the end of that unending road.” Yet finally we have arrived at our final two partitions of the Anatomy of Enlightened IT Service Costing.This mountain we have traversed together is such that “climbing it is hardest at the start;

The Skin: The Deplorable Bucket of “Other”

Let’s travel back to school days for a moment.  Can you remember back to Anatomy 101?  What is the largest organ in the human body?  It is a bit of a trick question.

No, it’s not the brain . . . 

No, it’s not the heart . . .

No, it’s not the stomach (although, for post quadragenarians, the stomach could be a close second) . . . 

Keep guessing . . . 

It is the skin.  The average adult has about eight pounds of skin which can be stretched out to about 22 square feet.  The fact is that most people get this question wrong.  How is it possible to take skin for granted? It is the most accessible area of the body. It surrounds us. It holds the rest of us together. Without it, living is not possible.

So, too, it is with those “other” considerations that make comprehensive IT costing so cumbersome because they do not neatly fit into our other buckets.  Some call it the “crystal ball.” Others call it the “magic eight ball.” Still others call it the “abracadabra box.”


I like to call it the “Deplorable Bucket of Other.” It is “deplorable” because large buckets of “other” tend to be the slaughtered at the quarterly “butcher’s block” meeting, the unwitting victim of budget slashing managers.  Surgical cuts are sometimes warranted, but only when the object of resection is clear.  Elective procedures should be avoided.  Too often the items in our “deplorable” bucket are not optional; we need them to deliver services.

“Other” considerations include things like overhead, shared salaries, unallocated and incidental costs.

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Overhead and Shared Salaries

Figure 1: Overhead or Indispensible Resources?

To many managers, “overhead” is so bad that it’s like two four-letter words rolled into one.  In fact, it is two four-letter words rolled into one.  Overhead is the first target for budget cuts.  For our purposes, overhead includes facilities and rental space, utilities (light, cooling, heat), and shared salaries.  But unless you plan on working in a tent with a laptop wired to an Idaho potato, you need to be located in some sort of office space.  Can you imagine servers in your data center sweating because there is no adequate cooling?  And what about Ezmerelda and Ivan, the two administrative assistants who support seven directors in charge of twenty-two departments with forty services?  Could you really survive without them?  Not to mention Jake, Abe, and Ike, who work on the server team and support multiple services.

At some level, you realize that a certain amount of controllable overhead is acceptable.  But how do you square this with service costing?

The Purist vs. The Practitioner

The purist would suggest that you identify every “other” or “overhead” asset and with something approaching scientific accuracy determine the percent of that asset that supports a particular service.  For example, Ezmerelda may support Director Bob, who “owns” Telecommunications and Networking Services.  If we really looked at how she spends her time, maybe we could determine that over the last six months, she spent 50% of her time on general administrative duties, 20% of her time supporting other departments and services, 20% of her time supporting the Telecommunications Service, and 10% of her time supporting Networking Services.  The purist would apply the same precise allocation logic to servers, infrastructure components, rental charges (by amount of space consumed by a particular department), etc.


Figure 2: The Practitioner Approach to Shared Salaries

In rare cases, the purist approach may be the best.  More often than not, the purist approach imputes false scientific rigor to the cost allocation process.  There are three good reasons why the purist approach should be avoided:

1. It is rarely accurate. I do not know many people who track their time on a minute-by-minute basis.  (I knew one guy, an accountant, in fact, who did this.  He also used a pedometer and complicated spreadsheet system to track how many steps he took each day for five years and compared his own records from year-to-year and day-to-day.  He was a good guy.  He was also the definition of a bean counter.)  Typically, time allocation is a best guestimate. 

2. Situations Change. It is also true that situations change.  For example, during the last six months, a major telephone system roll-out may have meant that Ezmerelda spent the bulk of her time supporting the Telecommunications Service.  But once the system stabilizes, she spends very little time supporting Telecommunications.  Or an application that supports a service “lives” with five other applications on a particular server.  As demand for the application grows, the application is migrated from a shared server and inherits its own server.

3. Have the right conversation. The purist approach often incites the wrong conversation.  To elaborate on our example above, an executive may wonder why during the last six months, an applications manager spent 60% of their time supporting the ERP system without understand that this was due to a major upgrade.  A better conversation to have would be around whether the right staffing levels are in place to meet demand and whether the staff have the appropriate skills to execute on our service management processes.

The Practitioner approach is often more reasonable.  In most cases, you can arrive at a good heuristic estimate without the time and expense it would take to perform more “scientific” allocation. Instead of guestimating how much time the administrative assistant spends supporting each department or each service, take the total salary and allocate it equally in a straight-line way across all services supported.  Adopt the same approach with the CIO salary and with the salaries of leaders in the PMO.


Figure 3: The Practitioner Approach to Allocation and Future Costs

The Diminishing “Other” Bucket, Incidental Expenses, & the Rivers’ Rule

A good goal is to achieve a diminishing “other” bucket over time.  However, it may not be possible to completely eliminate the “deplorable bucket of other” on day one (or ever, for that matter).  There may be incidental expenses, small unidentified items, and difficult to categorize costs that need to remain in the “other” bucket.  For this category of expenses, I suggest invoking the “Rivers’ Rule.”

Andy Rivers is my colleague here at Beyond20, and I highly suspect he did not invent this rule.  Nevertheless, he has applied this rule enough to earn the honor of naming it after him.  The Rivers’ rule, simply stated:

Whenever an “other” category is less than 20% of the overall budget, leave it alone.  Whenever an “other” category is greater than 20%, try to decompose it and allocate the cost items to the appropriate service.

Remember, we make the assumption that the items in our “other” bucket are needed to deliver services.  When our bucket approaches or exceeds 20%, executives start to wonder what is in the bucket and begin sharpening their cleavers.

Other Deplorable “Other” Considerations

There are a few other considerations when performing IT Service Costing:

  • Anticipated future costs of services
  • Maintenance expenses
  • Upgrades
  • Fleet replacements of hardware
  • Inflation
  • Salary increases
  • Existing Service Level Agreements (SLAs) with business customers
  • Tiered Service Levels, Tiered Service Offerings

Anticipated future costs, maintenance expenses, upgrades, fleet replacements, inflation, and salary increases, at a high-level, all speak to the issue of timing.  The best thing to do is to reasonably estimate the amounts associated with these, determine when these costs will hit (or over what period of time), and build these costs into your comprehensive service cost or into your chargeback.  For example, if you estimate that over the next three years you will spend $150,000 on maintenance and another $100,000 on upgrades, you should add $250,000 to the total cost of your service.  Alternately, you could phase chargebacks so that each year the cost to the business is marginally higher.

Existing Service Level Agreements (SLA) with business customers also need to be factored.  Achieving an SLA requires a certain amount of assets (people and technology), each of which has an associated cost.  If follows that any changes to an SLA have a direct or indirect impact on your costs.  For example, if you initially agree with the customer to restore a service within four hours after failure and subsequently change this to two hours, you will likely need to apply more resources to meet the new service level.  In other words, you might consider charging more. 

Tiered Service Levels and Tiered Service Offerings can be used to manage customer expectations and to align chargebacks with the level of service provided.  In the absence of tiers, customers expect the highest possible service for the lowest possible price.  Tiers help give customers more of what they want as long as they are willing to pay for it.

The Annual Health Check

There is no need to wait until green patches grow on the skin and stick like glue to assess whether your IT costing initiative is working.  An annual health check is just want the doctor ordered in terms of making sure that you are offering the right services for the right price.

Focus first on assessing your vital business services, the ones that the business cannot live without and where IT’s support is most valuable.  During the course of the year, did the business’ priorities change?  Were lines of service added or retired?  What changes occurred in the internal or external environments that impacted the services the business offers to its customers? 

If significant changes occurred to the business, engage business leaders to determine whether current IT services are still relevant or whether they need to be modified or retired and what new services IT could offer.  Do not be offended if the business suggests retiring a service.  It is natural that services wax and wane; some services become less important whereas other become essential. 

Another reason to conduct an annual health check is because costs change.  Many of us are accustomed to rising prices.  After all, when you go shopping, how often do prices actually go down?  But this is not always the case with services.  It is possible that as IT becomes better at service delivery or as more customers use the services we offer, we could benefit from efficiencies and smarter ways of working and actually reduce costs.  If you already factored in multiple-year expenses into service costing and chargebacks (per the previous section), it is still worthwhile to quickly check to see if your estimates were on target.

Remember, this is an annual health check; not a post mortem.  Don’t wait for things to go wrong before checking-in.  If mid-year something seems awry, spent a short amount of time on testing your observations.  For example, if mid-year, key hardware components that support a service unexpectedly rise in cost, you may consider raising the price you charge to deliver the service.

The annual health check is meant to be a quick check-in; not another full-blown comprehensive service costing initiative.  The best way to ensure that this is the case is to consider critical success factors and key performance indicators right from the start, when you begin your first service costing initiative.  Then, when you perform the annual health check, you can focus on a few important areas; not reinvent the wheel.

Follow Your Own Star!

Dear Reader,

Indeed, after five articles, seven partitions, 10,754 words, and forty-one labored literary or pop culture references, and a dreadful amount of information on enlightened IT Service Costing, I see that in your intellect now shines the never-ending light . . . The challenges are significant, but fortune favors the bold.  Do not delay!  Strive for perfection, but start where you are, with the information and capabilities you have to become better.  And know that I am always here as your trusted guide.  Follow your own star!


Originally published June 06 2017, updated January 01 2019