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IT Moves from SGA to COGS

Bernard Golden | March 18, 2016
Accounting – or, more accurately, IT finance – is undergoing just as dramatic a shift as the reset of IT, and with good reason.

Note that this is different than the endless and tiresome discussion about whether cloud computing costs are capex or opex. Both are typically assigned to IT in its traditional SGA placement, and primarily affects whether a given period’s cost is paid from yearly budget or depreciated from a balance sheet asset. 

No, this discussion is about how to account for technology use when that technology’s role has changed. Treating IT costs the way they have been in the past does not reflect that changed role; worse, it causes incorrect signals about how the business is operating to be transmitted throughout the organization. Which is to say, not placing IT costs appropriately means that product/service profitability cannot be accurately calculated. And that’s a huge problem for companies confronting their digital future. 

Let’s look at an example. Suppose a company wants to build deeper engagement with members of a casually interested community, with the aim of creating lead flow. So it creates a brand-oriented game (i.e., a company-created and -operated application) and promotes it on its social media outlets, seeking to direct viewers to the game, which will eventually identify viewers that are good prospects for the company’s product. 

The question is, how much does the game cost per user (the cost of the lead) versus the value of a lead (or, as many companies view these things, against the lifetime value of any customers generated by the game)? Well, if the value of obtaining the lead is $20, and each lead costs $10, that’s a great deal. If, on the other hand, the cost of each lead is $30, the initiative isn’t worth it. But the point is, it’s critical to know the cost to evaluate whether the initiative makes sense. 

And today, most IT organizations can’t possibly deliver the information to help in that evaluation. Obviously, that needs to change. 

What will IT organizations have to do in the not-very-distant future to support their COGS role? Here are a few items: 

Understand granular IT costs 

It’s shocking how poorly most IT organizations understand their costs. Most of them have rudimentary cost tracking systems and little active management to ensure accuracy. To offer one example: I saw a presentation by someone from a large tech firm that was moving to a better way to track costs discuss the process it went through. As part of the exercise, the firm conducted a survey of all the servers running in its data centers. It found 5,000 servers (!) that could not be assigned to any group or application. And this was a large, leading technology company. Imagine what the situation is at your run-of-the-mill medium size IT organization. 

 

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