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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.

Cloud computing further complicates this because of the monthly billing based on resource usage. This isn’t basic accounting with four-year depreciation and headcount assignment; this is highly dynamic payments that vary monthly. 

It’s critical that IT organizations implement sophisticated financial tracking. Otherwise the COGS exercise will remain nothing more than a leap of faith. 

Accurately assign costs 

A few years ago I was speaking to a large group of senior financial services IT executives. I asked how many did chargeback based on resource use. Two hands went up. For the rest, I assume they did a period gross cost assignment based on some convenient metric like portion of department headcount compared to overall company headcount. In other words, not at all related to actual resource use. 

The COGS world needs chargeback taken to the next level. Being able assign granular costs according to user groups, applications, and even individuals is critical to the future role of IT. And explaining that your organization isn’t very good at it because it wasn’t that important in the past won’t cut it. Nobody cares. It’s imperative that resource users know exactly how much they’re using and how much it costs. 

Analyzing usage and spend to reduce cost 

The first two steps outlined above provide the basics: how much stuff costs. But it’s important to analyze what’s being used to discover ways to save money; when IT is a COGS good, every cost saving improves profitability, which in most companies is the entire point of the organization. 

Today, there are businesses that track cloud usage and costs and provide recommendations to improve resource utilization. Soon they will provide recommendations about what providers would be the best choice for a given application configuration and load. 

These tools are important capabilities for an IT COGS world. And their use has to be consistent and ongoing, because application functionality and loads vary over time. Consider this: an application cost assessment may be quite accurate when originally generated, but become obsolete when video is added to the application. The application may be more engaging and generate additional revenues (good!), but without being able to analyze use and cost (and track back to the application), it’s impossible to know if it’s now losing money (bad!). 

Frankly, if you’re not already using these kinds of tools today and pushing the vendors to extend their functionality, you are way behind where you need to be. All elements of business are shifting to digital engagement, and not being able to analyze usage and cost means you’re driving blindly. 

Forecasting 

The next step in sophisticated COGS IT is to predict costs before actual use rather than learning about and assigning them after the fact. Most of the tools described above provide scenario-based planning which can be used to estimate potential application costs. However, their main purpose is to focus on the cost side of the ledger, and they don’t really provide the ability to also forecast revenue. 

 

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