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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.

Admittedly, this can be difficult, since revenues may themselves be somewhat difficult to concretely assign; after all, the value of a lead is itself an estimate of what revenue a lead can generate. 

Nevertheless, estimating costs without defining potential benefits means less useful information. It’s important that the plus side of the equation be filled in so that the minus side can be evaluated. 

A further fillip regarding forecasting is that it’s quite challenging to estimate potential application traffic, which cascades down to resource use, which may vary in a nonlinear fashion. Said another way, twice as much traffic might use three times as many resources. 

This makes adding Monte Carlo simulation to your forecasting effort a good idea. This kind of simulation varies an input across a range to see how it affects output. In this case, it would vary application load to see what, if any, effect there is on total resource use and, in turn, total cost. 

Forecasting will be helpful when trying to predict the total COGS structure for a given business initiative. As I noted, you should be using one of the usage and cost analysis tools that are available, and adding forecasting to this will give the ability to do better economic analysis of new business initiatives. 

Collaborate with business owners to co-design products and services 

All of the foregoing discussion has presumed analysis of a given product or service. In other words, someone has envisioned a product or service, and I’ve provided some recommendations on how to work on the IT COGS aspect. 

The next frontier is for IT to actively work with business owners (e.g., product managers) to co-design IT-infused products and services. There is an incredible profusion of IT capabilities coming to fruition – think ML, IoT, and social engagement – and most business-side representatives are not fully cognizant of their functionality or potential. IT can play a significant role by providing insight on what new capabilities can be integrated into new business offerings. 

This has the further benefit of helping address the COGS element of those offerings, making it possible reduce costs or raise profitability in new offerings. 

By working together, IT and business owners can envision new offerings better than either could do on their own; furthermore, they can jointly improve the economics of offerings, making it possible for the overall organization to more successfully serve the market. 

As I’ve repeatedly discussed in recent posts, the role of IT is changing dramatically. It’s easy to be fearful of a world in which many traditional IT responsibilities are migrating to external providers. However, it’s also important to recognize that many positive trends are happening with respect to IT as well. 

 

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